UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission File Number 1-3634
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CONE MILLS CORPORATION
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(exact name of registrant as specified in its charter)
North Carolina 56-0367025
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3101 North Elm Street, Greensboro, N.C. 27408
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 336-379-6220
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $ .10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of February 29, 2000 (based on the closing sale price of $3 15/16 of the
registrant's voting stock, as reported on the New York Stock Exchange Composite
Tape on such date) was approximately: $97,809,221.
Number of shares of common stock outstanding as of February 29, 2000: 25,479,717
shares.
Documents incorporated by reference: Proxy Statement for Annual Meeting to be
held May 9, 2000, Part III, Items 10, 11, 12 and 13 of this report.
Index to Exhibits - Pages 60-71
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PART I
ITEM 1. BUSINESS
THE COMPANY
OVERVIEW
Founded in 1891 Cone Mills Corporation (the "Company" or "Cone"), incorporated
and headquartered in North Carolina, is the world's largest producer of denim
fabrics and the largest commission printer of home furnishings in North America.
The Company competes domestically and internationally on the basis of styling
and product development, management experience, versatility and size of
manufacturing facilities, competitive prices and the Cone name and reputation.
The Company has a 50% interest in Parras Cone de Mexico, S.A., ("Parras Cone"),
a denim manufacturing facility in Mexico, and an alliance with the Ashima Group
of India.
The Company operates in three principal business segments: (1) Denim and Khaki,
(2) Commission Finishing and (3) Decorative Fabrics. In 1999, Cone substantially
exited the Yarn-Dyed Products segment as part of its comprehensive restructuring
program. The Company seeks growth of its products through expansion into new
geographic areas and markets, product development and investment in value-added
technology such as CAD/CAM. Capital expenditures for the last five years have
totaled approximately $180 million, and the Company expects to spend
approximately $12 million in 2000 for domestic capital projects.
The Company is engaged in denim production in Mexico through a joint venture
facility with Compania Industrial de Parras, S.A., ("CIPSA"). This facility,
Parras Cone, has been producing basic denims and yarn since late 1995. Under a
marketing agreement with CIPSA, Cone markets and distributes 100% of the denim
production of Parras Cone.
The Company has an alliance with the Ashima Group of India. This alliance
consists of an equity investment in Ashima Ltd., technical service agreements
and a marketing agreement whereby Cone markets Ashima denim and sportswear
products outside the Indian sub-continent. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives."
In 1999, the Company implemented a comprehensive reorganization and downsizing
initiative. The initiative consisted of four primary components: 1) closing of
the Salisbury plant, ceasing production of yarn-dyed shirting fabrics and
disposal of associated finished goods inventories, 2) downsizing and
reorganization of sales, manufacturing and administrative staffs of the
corporate staff and textile group, 3) outsourcing of ring-spun yarn
manufacturing at the Cliffside and Florence plants by forming a yarn alliance
and closing the manufacturing facility and 4) restructuring of the Carlisle
operation including the decision to exit the piece-dyed shirting product line.
The Company reduced employment by approximately 1,900 employees during 1999 as a
result of these initiatives. See "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition, Long-Term Strategic
Initiatives" and "Item 8. Financial Statements and Supplementary Data," Note 21
of the Notes to Consolidated Financial Statements.
BUSINESS SEGMENTS
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Information concerning operating segments for the Company's 1999, 1998 and 1997
fiscal years are incorporated by reference. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition, Long-Term
Strategic Initiatives" and "Item 8. Financial Statement and Supplementary Data,
"Notes 18 and 21 of the Notes to Consolidated Financial Statements.
DENIM & KHAKI
Retail sales of denim and khaki apparel products grew throughout most of the
1990s. The trend that began with casual Fridays in the 1990s has matured into a
key market driver for the apparel industry in this decade. In 1999, retail sales
of men's casual pants, primarily khakis, experienced double-digit increases;
however, denim apparel experienced marginal sales declines. The retail sales
decline in denim garments was primarily due to a fashion shift to other fabrics
for casual pants. In addition to casual lifestyles driving the growth of denim
and khakis, other factors that the Company considers important are: (i) the
enhanced value of casual garments to consumers resulting from lower acquisition
costs and lower life-cycle costs, (ii) enhanced styling and comfort of casual
garments and (iii) strong brands such as Levi, Dockers, Wrangler, The Gap, Old
Navy and Arizona which continue to create fashion interest for consumers.
The Company's domestic apparel fabrics markets have been affected by changing
demographics. Baby boomers as primary denim consumers are being replaced by
their children ("echo-boomers"). The echo-boomers account for the largest jeans
consumption segment of the U.S. population. Product trends, brand preferences
and garment silhouettes have evolved to meet the fashion demands of the
echo-boomers. Preferences by the echo-boomers for more intricate garment
styling, such as baggy jeans and carpenters pants as well as the favoring of new
brands, has allowed imports to gain market share. As the baby boom generation
has matured, product trends have evolved to higher quality products with more
diverse styling. These trends have resulted in a bifurcated market as
echo-boomers are focused on fashion silhouettes and specialized fabric
treatments while baby boomers desire better fabric quality and styling. The
Company attempts to compete in these markets by being a leader in product
development while maintaining high quality standards. Denim apparel is expected
to resume its growth at retail in 2000 as the U.S. population continues to grow,
the echo-boomers return to basic five-pocket jeans and the consumer wardrobe
becomes saturated with khaki products.
At the retail level, mass market and specialty retailers have gained market
share from department stores. This change in distribution has created the need
to differentiate marketing and manufacturing to provide the right product to
each distribution channel. The Company uses its Parras Cone facility to target
the mass market channel of distribution while its U.S. facilities are more
focused on specialty retailers and department store channels of distribution.
Internationally, consumption of denims has plateaued in industrialized
countries, with Europe showing a slight decline in recent years as khakis and
other fabrics have gained market share. Recently the Company has seen evidence
that denim demand in Europe is beginning to grow in both basic five-pocket jeans
and specialized denim fabrics. In less industrialized countries, the potential
market for denim jeans has continued to grow as youth populations expand.
However, the growth in denim demand has been tempered by economic weakness in
Asia and South America. Until consumers in Asia regain some of their lost
purchasing power, denim and apparel demand in these countries will continue to
be weak forcing the exporting of most of the region's production. In addition,
the Company's sales
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growth has been impacted by increased global supply primarily in countries with
lower labor costs.
The Company's denim products, accounting for the majority of the denim and khaki
segment's sales, are primarily designed for use in garments targeted for the
upper-end market, where styling and quality generally command premium fabric
prices. Fabric styling is supported by the Company's product development
specialists. Due to the nature of the manufacturing process, denim fabric
contains variations in color that give it a distinctive appearance. After
weaving, denim fabrics and garments are processed further in finishing
operations that produce different textures and other altered physical
properties. In the dyeing and finishing of khaki fabrics many different colors
and finishes are produced including the Company's fade resistant Deepdown(R)
fabric. During these processes, the Company's product development specialists
generally work in collaboration with customers to assure that fabrics meet
customer requirements and can be manufactured efficiently. This creates a strong
working relationship that allows Cone to react quickly to its customers' rapidly
changing needs.
Although the markets and end uses for denim are very diverse, the Company
categorizes the market into heavyweight denims and specialty-weight denims.
Heavyweight denim is used primarily in jeans and is by far the largest segment
of the denim market. Within the heavyweight market, the Company further
classifies its denims as "value-added" and "basic." Value-added denims are
distinguished by fabric construction, yarn variations, finishes and new product
introductions. Basic denims are less differentiated by styling with competition
being primarily on the basis of price, quality and service.
Cone's value-added denims are sold principally to brand name apparel companies,
specialty retailers and brand name garment producers. Cone's basic denims are
used primarily in garments sold through retail chains, department stores and
catalogs. Although most of the Company's basic denims are designed for the
upscale segment of these markets, the Company also produces high-quality basic
heavyweight blue denim, primarily at Parras Cone, to service the mass market
distribution channel. Sales of basic denims constituted approximately one-fourth
of the Company's total denim sales in 1999.
The Company's largest denim customer is Levi Strauss, whose 501(R) family of
jeans are produced solely from the Company's proprietary fabrics. Other
customers include V.F. Corporation (Wrangler and Lee), The Gap, Old Navy, Calvin
Klein, Aalfs, Arizona, P.L. Industries and Hilfiger. The Company's international
customers include Levi International, Joker Jeans and Big Star in Europe, Edwin
in Japan and VF Corporation (Wrangler and Lee) in South America.
Specialty-weight denims include a variety of woven constructions, colors and
weights and are used primarily in fashion garment silhouettes and women and
children's wear. These fabrics constitute a growing portion of the denim market
as recent growth in denim has occurred in fashion silhouettes such as baggy
jeans and carpenter pants at the expense of basic five-pocket jeans. These
denims tend to establish market trends because of their use in higher fashion
garments.
Cone also serves niche markets for piece-dyed fabrics with its ProSpin(R) fabric
which provides superior wrinkle resistance properties based upon yarn formation
technologies.
Manufacturing. The Company's denim facilities are modern, flexible, vertically
integrated and encompass all manufacturing processes necessary to convert raw
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fiber into finished fabrics. The Company's denim weaving facilities have all
re-loomed in the nineties. The Company's U.S. dyeing and finishing facilities
include a wide range of technologies, with seven indigo long-chain dyeing
machines, beam dyeing, continuous overdye machinery and raw cotton dyeing
equipment.
In addition to its U.S. facilities, the Company has a 50% equity interest in
Parras Cone, a low cost producer of high-quality basic denims. Under a marketing
agreement with its partner, Cone markets and distributes 100% of the fabric
production of Parras Cone.
Cone is recognized internationally as a quality leader with its weaving plants
being certified under the ISO 9002 process.
Product and process development is supported by manufacturing development
groups, which have specialists located in each facility. These groups work with
the Company's product development specialists and its customers' designers to
produce new products for the marketplace. The Company uses on-line
computer-aided design systems to increase styling effectiveness.
Competition. The denim and khaki fabrics business is highly competitive. Primary
competitive factors include price, product styling and differentiation, customer
service, quality and flexibility, with the significance of each factor dependent
upon the particular needs of the customer and the product involved.
No single company dominates the industry and domestic and foreign competitors
range from large, integrated enterprises to small niche companies. Competition
is in the form of both domestic and foreign piece goods and in the form of
imported apparel garments from Mexico, Asia and other areas. The migration of
garment manufacturing facilities to Mexico and Caribbean countries, additional
worldwide capacity, more aggressive pricing from domestic companies and the
proliferation of newly styled fabrics competing for fashion acceptance have been
factors affecting the Company's business environment. Denim jeans have an image
of being uniquely American products. The Company's competitiveness with
producers from other countries is influenced by tariffs and transportation
costs. Any failure of the Company to compete effectively in this environment or
to keep pace with changing markets could have a material adverse effect on the
Company's results of operations and financial position.
In recent years due to the competitiveness of the apparel business and the
criticality of low wage costs for garment producers the Company has explored a
number of international initiatives. Its objectives for expansion into Mexico
included seeking access to the Mexican distribution system to sell the Company's
products and access to lower cost cut-and-sew facilities in order to increase
market share with private label customers and large branded customers migrating
to Mexico. The Company is also seeking to gain production cost advantages while
benefiting from its technological expertise. As the garment industry has
migrated to Mexico from the U.S. the Company has benefited from Parras Cone's
cost structure and location, and Cone's U.S. infrastructure.
In 1999, the Company announced plans to continue its denim manufacturing
expansion in Mexico. The Company has a strategic project to co-develop an
industrial park and to build a denim facility in Altamira, Mexico. This project
as announced will initially have three components: 1) a 50/50 joint venture with
Guilford Mills, Inc. to develop and operate a textile and apparel industrial
park on over 500 acres, 2) 100% owned basic ring-spun, value-added denim plant
with
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an initial capacity of 20 million yards expandable to 40 million yards and 3) a
51/49 joint venture to build and operate a yarn facility to support the denim
plant and the Mexican yarn market. The Company expects to fund its investment in
the industrial park of approximately $9 million in 2000. Capital requirements
for the denim and yarn facility will be in 2001. The funds required for the
denim and yarn facilities will require debt financing, which the Company has not
arranged at this date. There is no assurance that the Company will be able to
obtain financing on terms and conditions acceptable to the Company. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition, Long-Term Strategic Initiatives."
In 1998, the Company formed an alliance with the Ashima Group of India that
allows Cone to market Ashima denim and sportswear products worldwide outside the
Indian sub-continent. This alliance will allow Cone to provide products that
cannot be competitively produced in the U.S. to its customers on a worldwide
basis.
The Company is continuously assessing the feasibility of additional
manufacturing platforms and alliances within certain trade blocs in order to
compete more effectively in its markets.
Seasonality. Demand for the Company's denim and khaki products and the level of
the Company's sales fluctuate moderately during the year. There are three retail
selling seasons: spring, fall (back-to-school) and the holiday season. The
Company's sales for a particular selling season generally begin six months in
advance of that season.
Marketing and Sales. The Company's marketing focus is to serve brand name
apparel customers through the development of products that are recognized in the
marketplace for their distinctive quality, durability and styling. Styles of the
Company's denim and other fabrics vary in color, finish, weight and
construction, depending upon fashion trends and the needs of the specific
customer. The Company's product development specialists monitor fashion trends
throughout the U.S., Europe, Far East and South America, attend fashion and
trade shows, meet with garment manufacturers and retailers and conduct market
research. In addition, the Company maintains an international focus with a long
history of distributing its products internationally. In 1999 the Company
exported approximately 37% of its denim sales.
The textile group is organized and managed by its major product lines of denim,
khaki and other piece-dyed products and products produced by Ashima. The
marketing group is headquartered in Greensboro, North Carolina with sales
offices in New York, San Francisco, Los Angeles, Dallas and Brussels to provide
a more direct working relationship with the customer. In addition, the Company
has sales agents in Europe, Japan, Hong Kong, Africa, and throughout Central and
South America, and it maintains support services in trade financing, traffic and
transportation in order to support its international presence. The Company's
strategy is to service its international customers with the same degree of
commitment to quality, service and fabric development as its domestic customers.
The Company's denim and khaki exports were approximately $154 million, $177
million and $176 million in 1999, 1998 and 1997, respectively.
Raw Materials. Cotton is the primary raw material for the Company's fabric
manufacturing operations, its purchased yarn and greige goods (fabrics that have
not been dyed or finished). United States agricultural programs affect the cost
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and supply of cotton in the U.S., and the policies of foreign governments have
an effect on worldwide prices and supplies as well. The U.S. Department of
Agriculture provides several programs to keep the effective price to cotton
purchasers competitive with world levels while protecting the grower. Step 2 of
the Federal Agriculture Improvement and Reform Act provided a formula for
payments to users of domestically produced cotton when domestic cotton prices
exceeded world prices for a period of time. Funds for these payments were
depleted in December 1998. The Step 2 program received additional funding in
October 1999 and the Company expects to receive rebates throughout 2000.
Although management believes that U.S. companies will continue to be able to
acquire adequate cotton supplies at prices competitive with offshore
manufacturers, there can be no assurance that these results will always occur.
To the extent that effective U.S. cotton prices exceed world prices, the
Company's competitiveness may be materially adversely affected, as the Company
cannot always fully pass increased cotton costs on to its customers. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition."
Since cotton is an agricultural product, its supply and quality are subject to
the forces of nature. Although the Company has always been able to acquire
sufficient supplies of cotton for its operations in the past, any shortage in
the cotton supply by reason of weather, disease or other factors could
materially adversely affect the Company's operations. See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition."
The Company has an established cotton purchasing program, administered in
conformance with policies approved by the Board of Directors, to ensure an
uninterrupted supply of appropriate quality and quantities of cotton, to hedge
committed and anticipated fabric sales and to manage margin risks associated
with price fluctuations on anticipated cotton purchases. The Company primarily
uses forward purchase contracts and, to a lesser extent, futures and options
contracts. Management believes that its cotton purchasing program has resulted
in lower overall cotton prices than if cotton were purchased solely on a spot
market basis or by solely matching cotton purchases with product sales. Since
prices for forward purchase contracts are sometimes fixed in advance of
shipment, the Company may benefit from its fixed price purchases in cotton if
prices thereafter rise, or fail to benefit if prices subsequently fall. There
can be no assurance the forward purchase contracts and hedging transactions will
not result in higher cotton costs to the Company or will protect the Company
from price fluctuations.
Cone also purchases yarn, greige goods and dyes and chemicals. Based on the
Company's strategy to limit its investment in yarn manufacturing in the future,
it has formed alliances with yarn manufacturers to ensure adequate supplies at
competitive prices. Pursuant to its decision to outsource an increased portion
of its yarn manufacturing, the Company entered into a supply agreement with
Parkdale America, LLC, during 1999. Additional yarn and other materials used by
the Company have normally been available in adequate supplies through a number
of suppliers.
Trade. The North American Free Trade Agreement ("NAFTA"), which became effective
on January 1, 1994, has created a free-trade zone among Canada, Mexico and the
U.S. NAFTA contains safeguards that were sought by the U.S. textile industry,
including a rule of origin requirement that products be processed in one of the
three countries in order to benefit from the agreement. NAFTA will phase out all
trade restrictions and tariffs on textiles and apparel among the three
countries. NAFTA has been responsible in part for Mexico recently surpassing
China as the
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largest exporter of apparel to the U.S. NAFTA and the Caribbean Basin Initiative
program, through favored quota and tariff treatment, have accelerated the shift
in production of garments to sources in this hemisphere, indirectly benefiting
U.S. textile producers and the Company. The Company's Mexican joint venture,
Parras Cone, benefits from its access to U.S. markets and has benefited from
NAFTA.
Legislation has been proposed in the U.S. Congress that would increase the trade
benefits currently available to the countries in the Caribbean to the point
where they would be roughly equivalent to those applicable to Mexico under
NAFTA. Legislation has also been introduced relating to trade between the U.S.
and Sub-Saharan African nations which, if enacted, could have a negative impact
on the Company. Both pieces of legislation have been proposed in previous
sessions but have not become law. These bills in various forms continue to be
considered in 2000, and the Company cannot predict the ultimate impact, if any,
of the legislation.
The impact of multilateral agreements intended to liberalize global trade could
also significantly affect U.S. textile producers and the Company. The World
Trade Organization ("WTO") is overseeing the phaseout of textile and apparel
quotas over a ten-year period through 2004. Tariffs on textile/apparel products
are being reduced (but not eliminated) over the same ten-year period. In
addition, the Clinton Administration recently announced an agreement with China
(which is subject to Congressional approval) to facilitate its admission to the
WTO.
In response, the Company has focused its operations on the manufacture of
fabrics for use in garments that are less vulnerable to import penetration.
Management believes the location of the Company's U.S. manufacturing facilities,
its 50% interest in the Parras Cone plant in Mexico, its alliance with the
Ashima Group of India and its emphasis on shortening production and delivery
times allow Cone to respond more quickly than foreign producers to changing
fashion trends and to its domestic customers' demands for precise production
schedules and rapid delivery. The Company has invested in technological and
process improvements to meet demand for quality and styling. Its emphasis on
customer service is supported by its just-in-time and quick response programs
and by electronic data interchange (EDI) with customers. These efforts have
improved communication, planning and processing time in manufacturing.
In instances where the Company finds itself uncompetitive with imports, the
Company is pursuing initiatives either to manufacture or source products
internationally or to exit the product line, such as the decision to exit the
chamois shirtings product line in 1999.
COMMISSION FINISHING AND DECORATIVE FABRICS
Commission Finishinq. The commission finishing segment, consisting of the
Company's Carlisle and Raytex plants, is the largest commission printer of
decorative fabrics in the U.S. and provides custom printing and plainshade
dyeing services to leading home furnishings stylists and distributors. As
commission printers, Carlisle and Raytex print fabrics owned by customers on a
fee basis. Converters purchase unfinished fabrics from weaving mills, use
outside sources such as Carlisle to dye the fabrics and print their designs and
then market the finished fabrics to home furnishings and apparel manufacturers.
The home furnishings fabrics processed at its Carlisle facility are generally
used for upholstery and drapery prints. The Company also provides fabric
printing
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and plainshade dyeing services to converters of fashion apparel fabrics. Cone's
khaki product line is primarily dyed and finished at the Carlisle facility.
The Carlisle plant is a modern, one-million square foot facility specializing in
rotary screen printing. In recent years, the Company has invested heavily in
computerized color-mixing systems and automated process controls in order to
support its competitive strategy of focusing on quality and service. Customers
for Carlisle's home furnishings printing services include P. Kaufman, Springs
Industries, Waverly Division of F. Schumacher & Co. and Covington.
The Raytex plant is a modern, 266,000 square foot facility specializing in wide
rotary screen printing. In 1996, a new preparation range was installed providing
additional product capabilities. Raytex is one of the largest wide-fabric
commission printers in the United States. Customers for Raytex include Springs
Industries, Tietex Ticking, Croscill, Burlington Industries and Revman
Industries.
Cone's commission finishing marketing headquarters are located in New York City.
Marketing efforts of the New York sales staff are augmented by close working
relationships between Carlisle and Raytex's production and technical staffs and
customers' designers and stylists. The Company's commission finishing operations
also maintain a customer service center that utilizes electronic data
interchange (EDI) with major customers.
Consumer fashion preference is based upon coloration, texture and value. As with
all home furnishing fabrics, there is fashion risk that affects consumer
preference. In recent years, home furnishing prints have been out of fashion
favor as compared to other home furnishing fabrics.
In 1999, the Company restructured the Carlisle operation to reduce cost, improve
quality and more aggressively position itself in the marketplace. The reductions
in cost were substantially complete by the end of 1999 with quality savings and
market opportunities expected to be realized in 2000.
Decorative Fabrics. The Company's decorative fabrics segment includes John Wolf
and Cone Jacquards. John Wolf is a "converter" of printed, jacquard and solid
woven fabrics for upholstery, draperies and bedspreads. A converter designs and
distributes fabrics, which are manufactured and printed for the converter by
others. The decorative fabrics' lines are printed primarily at the Carlisle
plant under the names "John Wolf Decorative Fabrics" and "David and Dash." John
Wolf customers include Corinthian Furniture Inc., Arden Companies, Bauhaus USA
Inc. and Burlington House Fabrics.
Cone Jacquards, a modern 142,000 square foot facility with wide weaving
machines, produces broadloom jacquard fabrics for furniture manufacturers,
fabric distributors, retailers, converters and specialty products manufacturers.
Customers for Cone Jacquards include Gum Tree Fabrics, Inc., Valley Forge
Fabrics, Inc., Fieldcrest Cannon and Westpoint Stevens, Inc.
Decorative fabrics are marketed domestically and internationally through the
segment's sales staff and sales agents. The sales staff and sales agents handle
sales to large customers such as hotels, institutions and furniture
manufacturers, as well as jobbers, who resell to decorators, fabric retailers
and certain smaller quantity users. International sales and sales to other
smaller customers are made primarily through agents.
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In 1999 the Company consolidated the sales agents for John Wolf and Cone
Jacquards and began the integration of product lines to present a coordinated
line to the marketplace.
Competition. The finishing and decorative fabrics business is highly competitive
and the Company competes primarily on the basis of quality and service. The
commission finishing segment competes directly with several large commission
printers as well as a number of smaller competitors. The decorative fabrics
segment competes with a large number of domestic and foreign suppliers of
decorative fabrics and jacquard woven fabrics.
Seasonality. Demand for the Company's finishing services and decorative fabrics
and the level of the Company's sales fluctuate moderately during the year with
January being a seasonally slow period.
YARN-DYED PRODUCTS
The Company's yarn-dyed products consisted primarily of flannel shirting
fabrics. Due to market conditions, manufacturing cost competitiveness and
competition the Company ceased production of fabrics for the yarn-dyed segment
at its facilities in May 1999 and liquidated associated inventories by year-end
1999.
Manufacturinq. The Company's Salisbury facility provided the dyeing and weaving
production for the yarn-dyed product line. Due to extensive losses in this
product line in recent years and the cost structure of the Salisbury plant, the
Company closed the facility in 1999. The Company plans to continue to be in the
yarn-dyed business on a limited basis primarily through products produced by
Ashima.
The Company uses on-line computer-aided design systems to increase styling
effectiveness and will electronically link with Ashima in the development of
products and patterns.
Competition. The yarn-dyed products business is highly competitive with the
primary form of competition being imported garments. As styling became more
complex with finer yarn counts, labor intensity of the product increased cost
advantages for Asian producers resulting in the Company becoming uncompetitive.
As discussed previously, the Company formed an alliance with the Ashima Group of
India that allows Cone to market Ashima products worldwide outside the Indian
sub-continent. Ashima produces an extensive line of yarn-dyed products and the
Company will provide Ashima with its technical assistance and styling to enhance
Ashima's product offerings in this area. This alliance should provide Cone's
customers with cost competitive products.
Seasonality. Demand for the Company's yarn-dyed products was very seasonal due
to the fact that the primary product is heavyweight flannels. As the Company
moves forward in its alliance with Ashima the Company should have products for
both the spring and fall selling seasons.
OTHER SEGMENT
The "Other" segment consists of synthetic fabrics, which were sold in January
1997, real estate operations, which were sold in May 1997, and other
miscellaneous ancillary operations.
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TRADEMARKS, COPYRIGHTS AND PATENTS
The Company owns several registered trademarks containing the "Cone" name and
various designs. In addition, the Company holds various other trademarks, trade
names, copyrights and patents used in connection with its business and products,
both domestically and internationally. The Company believes that the name
recognition of Cone and its reputation for quality, service and product
development have value in both domestic and international markets.
CUSTOMERS
The Company has one customer, Levi Strauss, which accounts for more than 10% of
net sales. Sales to this customer accounted for approximately 31%, 32% and 37%
of sales in 1999, 1998 and 1997, respectively. Levi is transitioning from owned
facilities to a greater reliance upon contractors. The Company cannot predict
the long-term impact on sales, if any, of this change in Levi's manufacturing
strategy. The loss of Levi as a customer, or a significant reduction in its
purchases from the Company, would have a material adverse effect on the
Company's financial position and results of operations.
Levi has been a customer of the Company since 1915 and a close, cooperative
supplier/customer relationship has evolved through the development of the
Company's proprietary fabrics for use in Levi's 501(R) family of jeans. In
addition to supplying fabrics for Levi's 501(R) family of jeans, the Company
sells other denim fabrics to Levi. Because the Company is Levi's major denim
supplier, Levi initiated discussions with the Company in 1989 concerning ways to
assure the continuity of this relationship. As a result of these discussions,
Cone and Levi entered into an exclusive Supply Agreement as of March 30, 1992,
which confirms that Levi will continue to use only Cone's proprietary denim
fabrics in manufacturing Levi's 501(R) family of jeans and that Cone will
continue to supply such fabrics solely to Levi. The volume of purchases by Levi
and the prices charged by Cone will continue to be subject to customary
negotiations between the parties.
The Supply Agreement expires in March of 2005 and is automatically extended each
year, unless either party gives notice otherwise, so that the remaining term is
five years. Following a change in control, the Supply Agreement would terminate
at the end of the three-year supply arrangement or of the lease term, as the
case may be. Additionally, Levi may terminate the Supply Agreement at any time
upon 30 days' written notice and either party may terminate the Supply Agreement
in the event of the other party's insolvency, bankruptcy or occurrence of a
similar event.
BACKLOG
The Company's order backlog was approximately $85 million at January 30, 2000,
as compared to approximately $125 million at January 31, 1999. In periods of
declining fabric prices, customers typically place orders closer to the date of
their expected needs. In 1999, the order backlog for the yarn-dyed shirtings
product line was $15 million. As discussed earlier, the Company exited this
product line in 1999. The Company's order backlog pertains primarily to the
denim and khaki segment and jacquards. Denim and Khaki accounted for 81% of the
order backlog at January 30, 2000.
Physical deliveries for accepted fabric orders in the apparel industry vary in
that some products are ordered for immediate delivery only, while others are
11
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ordered for delivery several months in the future. In addition, the Company has
an ongoing proprietary program for which orders are issued only for nearby
delivery. Therefore, orders on hand are not necessarily indicative of total
future revenues. It is expected that substantially all of the orders outstanding
at January 30, 2000, will be filled within the first four months of 2000.
RESEARCH AND DEVELOPMENT
The research and development activities of the Company are directed primarily
toward improving the quality, styling and performance of its apparel fabrics and
other products and services. The Company also is engaged in the development of
computer-aided design and manufacturing systems and other methods of improving
the interaction between the Company's stylists and its customers. These
activities are conducted at various facilities, and expenses related to these
activities are an immaterial portion of the Company's overall operating costs.
GOVERNMENTAL REGULATION
Federal, state and local regulations relating to the workplace and the discharge
of materials into the environment are continually changing; therefore, it is
difficult to gauge the total future impact of such regulations on the Company.
However, existing government regulations are not expected to have a material
effect on the Company's financial position, operating results or planned capital
expenditures. The Company currently has an active environmental protection
committee and an active workplace safety organization.
EMPLOYEES
At January 31, 2000, the Company employed approximately 4,300 persons, of whom
approximately 800 were salaried and approximately 3,500 were hourly employees.
Of such hourly employees, approximately 1,200 are represented by collective
bargaining units and are employed under collective bargaining agreements that
provide for annual wage negotiations in the spring of each year. Based upon its
records relating to the withholding of union dues from employee compensation,
the Company believes that approximately 450 of its employees are dues-paying
union members. The Company has not suffered any major disruptions in its
operations from strikes or similar events for more than a decade and considers
its relationship with its employees to be satisfactory.
ITEM 2. PROPERTY
Cone's U.S. manufacturing facilities consist of seven plants, five located in
North Carolina and two in South Carolina, with approximately 4.5 million square
feet of floor space. The denim and khaki segment operates four plants, the
commission finishing segment operates two plants and the decorative fabrics
segment operates one plant. The Company also maintains several distribution
centers and warehouses. Internationally, the Company has a 50% interest in a
575,000 square foot denim manufacturing facility in Parras, Mexico. In addition,
the Company owns its Salisbury, North Carolina plant, closed in 1999, which
contains approximately .5 million square feet of floor space. Also, during 1999,
the Company closed the yarn manufacturing portions of two additional North
Carolina facilities, Florence and Cliffside, which constitute approximately .2
million square feet of floor space.
All such facilities are maintained in good condition and are both adequate and
suitable for their respective purposes. The Company's manufacturing facilities
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are substantially fully utilized except for those facilities in which the
Company has outsourced yarn manufacturing.
All U.S. manufacturing facilities are pledged as security, as of January 28,
2000, for the Company's indebtedness under its debt agreements. The Mexican
denim facility serves as collateral for a portion of the debt of the joint
venture company.
The Company leases its executive and administrative offices, located in
Greensboro, North Carolina. Other offices, located in various U.S. cities and
Brussels, are leased from unrelated parties.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these matters, management believes that the
probable resolution of such contingencies will not have a material adverse
effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position with the Company
- ---- --- -------------------------
John L. Bakane 49 Director, President and
Chief Executive Officer
Anthony L. Furr 56 Executive Vice President
Gary L. Smith 41 Executive Vice President and
Chief Financial Officer
Neil W. Koonce 52 Vice President, General Counsel
and Secretary
Michael K. Horrigan 45 Vice President
Marvin A. Woolen, Jr. 59 Vice President-Cotton Purchasing
David E. Bray 61 Treasurer
Christopher F. Conlon 43 Controller
All officers of the Registrant are elected or reelected each year at the Annual
Meeting of the Board of Directors or at other times as necessary. All officers
serve at the pleasure of the Board of Directors and until their successors are
elected and qualified.
John L. Bakane joined the Company in 1975. He was named Chief Financial Officer
in 1988 and was elected to the Board of Directors in 1989. He was elected
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Executive Vice President in 1995. In November 1996, he assumed responsibility
for management of the Denim Group of the Company and in April 1997 he was
appointed President of Cone Apparel Products Group. He was appointed Chief
Operating Officer in April 1998, and served in such capacity until elected
President and Chief Executive Officer in November 1998.
Anthony L. Furr joined the Company in May 1997 as Vice President and Chief
Financial Officer and served in that capacity until February 1999 when he was
appointed Executive Vice President and Chief Financial Officer. He was appointed
acting president of the Cone Finishing Division on November 9, 1999 at which
time he relinquished the title of Chief Financial Officer. From 1992 to 1995 he
was Chairman, President and Chief Executive Officer of Wachovia Bank of South
Carolina, N.A. and Executive Vice President of the parent Wachovia Corporation
for whom he served as Executive Vice President and Chief Financial Officer from
1990 to 1992.
Gary L. Smith was employed by the Company in 1981 and was serving as Manager of
Business Analysis when he was elected Assistant Controller in 1994. He was named
Controller in December 1996, Executive Vice President in February 1999 and Chief
Financial Officer on November 9, 1999.
Neil W. Koonce was employed by the Company in 1974. He has been General Counsel
since 1987, Vice President since 1989, and Secretary since February 1999.
Michael K. Horrigan was employed by the Company in March 1999 as Vice President,
Human Resources. He served as Vice President of Human Resources for the sales
and marketing and bed fashions groups at Springs Industries from February 1997
to March 1999. Before joining Springs, he was employed by Sara Lee branded
apparel businesses for eight years, including five years as Vice President of
Human Resources for Champion Products. For ten years prior to that he worked in
human resources for General Electric.
Marvin A. Woolen, Jr. was employed by the Company in July 1995 as director of
cotton purchasing. He was elected Vice President in 1997. He has been in the
cotton sales, merchandising, purchasing, classing and shipping business since
1971. From 1988 to 1995 he was president of Rollins Company, a cotton shipping
firm.
David E. Bray has been employed by the Company since 1977 and has been Treasurer
since 1988.
Christopher F. Conlon was appointed Controller on November 9, 1999. He
previously worked at Cone Mills for eight years in the 1980s in several
financial roles including cost accountant, plant controller, and division
controller returning to Cone Mills in 1998 as Group Controller and later served
as Director of Business Planning. He worked as Chief Financial Officer of Kron
Medical Corporation, Spectrum Glass Products and Sandlapper Fabrics. He also was
Chief Operating Officer at Sandlapper Fabrics from 1996 to 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has traded on the New York Stock Exchange under the
ticker symbol "COE" since June 18, 1992, the date of its public offering. The
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approximate number of holders of record of the Company's Common Stock as of
January 31, 2000, was 382.
Information required by this Item on the sales prices and dividends of the
Common Stock of the Company are incorporated in "Note 23. Quarterly Financial
Data (Unaudited)" on page 55 of "Item 8. Financial Statements and Supplementary
Data" and is incorporated herein by reference.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL FINANCIAL REVIEW
<TABLE>
<CAPTION>
(in millions, except per share data and number of employees) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net Sales $ 616.3 $ 728.6 $ 716.9 $ 745.9 $ 910.2
Cost of Sales (a) 568.2 661.8 664.4 662.0 802.6
-----------------------------------------------------------------------
Gross Profit 48.1 66.8 52.5 83.9 107.6
Selling and Administrative (a) 48.7 57.4 55.6 65.9 72.2
Restructuring and Impairment of Assets 16.0 17.1 5.2 5.2 -
-----------------------------------------------------------------------
Income (Loss) from Operations (16.6) (7.7) (8.3) 12.8 35.4
Other Expense - Net 13.9 12.1 11.7 14.9 14.5
-----------------------------------------------------------------------
Income (Loss) from Operations Before Income Taxes
(Benefit), Equity in Earnings (Losses) of
Unconsolidated Affiliate and Cumulative Effect
of Accounting Change (30.5) (19.8) (20.0) (2.1) 20.9
Income Taxes (Benefit) (10.7) (7.9) (8.0) (2.3) 7.3
-----------------------------------------------------------------------
Income (Loss) from Operations Before Equity in
Earnings (Losses) of Unconsolidated Affiliate and
Cumulative Effect of Accounting Change (19.8) (11.9) (12.0) 0.2 13.6
Equity in Earnings (Losses) of Unconsolidated Affiliate 1.7 5.2 2.6 (2.4) (16.9)
-----------------------------------------------------------------------
Loss from Operations Before Cumulative
Effect of Accounting Change (18.1) (6.7) (9.4) (2.2) (3.3)
Cumulative Effect of Accounting Change (1.0) - - - -
-----------------------------------------------------------------------
Net Loss $ (19.1) $ (6.7) $ (9.4) $ (2.2) $ (3.3)
-----------------------------------------------------------------------
Per Share of Common Stock
Loss Before Cumulative Effect of Accounting Change
Basic $ (0.83) $ (0.37) $ (0.47) $ (0.19) $ (0.22)
Diluted (0.83) (0.37) (0.47) (0.19) (0.22)
Net Loss
Basic (0.87) (0.37) (0.47) (0.19) (0.22)
Diluted (0.87) (0.37) (0.47) (0.19) (0.22)
BALANCE SHEET DATA (AT YEAR END)
Current Ratio 1.1 1.6 1.5 1.7 1.6
Total Assets $ 472.8 $ 488.5 $ 506.6 $ 530.0 $ 584.3
Long-Term Debt 198.8 172.1 150.4 160.7 173.0
Stockholders' Equity 157.5 181.9 196.5 210.3 222.1
Long-Term Debt as a Percent of Stockholders' Equity
and Long-Term Debt 56% 49% 43% 43% 44%
Shares Outstanding (millions) Year End 25.5 25.4 26.2 26.3 27.4
OTHER DATA
Capital Expenditures $ 13.2 $ 32.8 $ 36.3 $ 36.2 $ 61.7
Common Stock Dividend Paid - - - - -
Number of Employees at Year End 4,300 6,200 6,100 6,700 7,900
</TABLE>
(a) Selling and administrative expenses for prior years were restated to conform
to industry practices.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
During 1999, Cone Mills had lower operating results as the Company implemented a
comprehensive restructuring program, and the industry in general was negatively
impacted by a number of internal and external factors.
The economic slowdown in Asian and Latin American countries resulted in
worldwide supply and demand imbalances in garments and fabrics. Foreign mills
were forced to produce and export to the U.S. at depressed prices. The result
has been intensified foreign competition and depressed pricing which severely
impacted the U.S. industry's earnings and stock prices. Large U.S. apparel
fabric producers generally had poor operating results in 1999.
The Company encountered depressed market conditions in denim fabrics during 1999
resulting in a significant reduction of sales in the third and fourth quarters.
Retail sales of denim garments showed a slight decrease for 1999. Lower denim
fabric sales resulted primarily from a stronger consumer interest in khakis,
inventory adjustments by retailers and wholesalers of brands, and the continued
worldwide over-capacity in denims even as several competitors exited the U.S.
market. In addition, the trend to baggier silhouettes negatively impacted U.S.
mills. The resulting increase in sewing complexity and requirements for better
needle capability favored low-cost Asian producers. The Company has experienced
severe price pressure reflecting these conditions, and throughout 1999,
operating schedules at the denim manufacturing plants were curtailed to control
inventories. In early 2000, the Company began to see some improvements in denim
market conditions that should benefit U.S. mills. Notably, more denim is being
shown in certain product lines and there appears to be a shift of fashion back
to basic five-pocket jeans.
The Company continued to encounter manufacturing difficulties at its Carlisle
Finishing plant through the first nine months of 1999. However, in the fourth
quarter, Carlisle benefited from cost reductions associated with its
restructuring. The facility improved capacity utilization with a broadened
customer base, improved efficiency and quality, and earned a small operating
profit. The consolidation of the Company's Granite Finishing operations into
Carlisle that began in 1997 disrupted manufacturing efficiencies to a greater
extent than anticipated, which materially adversely impacted results of the
commission finishing segment during 1998 and 1999.
During 1999, the Company ceased production of yarn-dyed products and liquidated
associated inventories. Adverse market conditions increased import penetration
of yarn-dyed products, and ineffective marketing and merchandising programs
resulted in significant operating losses. Following unsuccessful attempts to
make use of the Salisbury yarn-dyed plant profitably, the Company closed this
facility in the second quarter of 1999.
In response to business conditions for apparel products and commission
finishing, the Company implemented a comprehensive downsizing and reorganization
program in 1999, which included:
1) The streamlining of product offering of the sportswear division
including the closing of the Salisbury plant which produced yarn-dyed
shirting fabrics.
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<PAGE>
2) The downsizing and reorganization of the corporate administrative staff.
3) The merger of the denim and sportswear fabrics businesses into one unit.
4) The reduction of the manufacturing staff to simplify the management
structure.
5) The closing of the Florence and Cliffside ring-spun yarn manufacturing
facilities, coupled with the outsourcing of yarn to reduce operating
costs and conserve capital which would have been required for equipment
modernization.
6) The restructuring of the Carlisle plant reducing the workforce by
approximately 25%, increasing efficiencies and quality, and refocusing
of marketing activities.
7) The exit of the chamois flannel shirting product line with the
restructuring of Carlisle.
The Company expects to achieve on an annual basis over $40 million of cost
savings as a result of these initiatives.
The Company restructured its decorative fabrics operations in 1998, which
included the consolidation of Cone Jacquards and John Wolf divisions, reductions
of staff and overhead, and the development of a new management team. The
decorative fabrics units made progress in 1999 by broadening their product lines
and customer bases as well as expanding capacity.
Significant factors that influence the Company's operating results and financial
condition include general business cycles, consumer fashion preferences, changes
in demand for print fabrics, international trade conditions, rising market
interest rates as well as the terms on which debt financing is available to the
Company.
Management also believes that one of the most significant factors affecting
operating margins is the price of cotton, which varied between the $.50s and
$.70s through much of 1997, 1998 and 1999. The Company has purchased cotton at
fixed prices for delivery throughout 2000. The Company expects 2000 average
cotton prices to be lower than 1999 levels because of the lower cotton market in
general and payments to be received under the U.S. government cotton program.
LONG-TERM STRATEGIC INITIATIVES
Cone's business strategy is to invest and grow in its core franchises where it
is recognized as a market leader. The Company seeks sales growth of denim and
khaki fabrics, commission finishing and decorative fabric businesses through
expansion into new geographic markets, aggressive marketing efforts, product
development, investment in technology and strategic manufacturing initiatives.
Consistent with its strategy to focus on core strengths, the Company divested
the assets of its real estate subsidiary and synthetics fabric business in 1997
and exited yarn-dyed and chamois flannel shirting business in 1999.
The Company has an alliance with a related group of companies known as the
Ashima Group of India. This alliance was formed in August of 1998. The Ashima
Group produces and markets a broad product line of denim and sportswear fabrics.
The alliance consists of four elements: 1) the purchase by Cone of approximately
8% of Ashima Ltd. capital stock for $3.6 million; 2) Cone's providing technology
and technical services to the Ashima companies, receiving fees as compensation;
3) Cone certification of certain Ashima products for distribution throughout the
world; and 4) the right of Cone to market Ashima products outside the Indian
sub-
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continent under the name Ashima-Cone.
The Company has established priorities for the use of cash flow and debt
capacity. The first priority is investment in international denim manufacturing
facilities and marketing opportunities. In April 1999, Guilford Mills, Inc. and
the Company entered into a 50/50 joint venture to develop and operate a new
textile and apparel industrial park in Altamira, near Tampico, Tamaulipas,
Mexico. It is expected that Cone's investment in the industrial park will be
approximately $9 million. The textile plant planned to be built on the property
by Cone will be a basic ring-spun, value-added denim plant with an initial
capacity of 20 million yards expandable to 40 million yards. The Company expects
to invest approximately $60 million in the initial denim facility. In addition,
the Company is in negotiations to form a joint venture to build a yarn
manufacturing facility to support the denim operation. The yarn facility is
expected to cost $30 million and the Company expects to own 51% of the joint
venture. The Company plans to start construction of the denim facility and joint
venture yarn facility in 2001 after the completion of the infrastructure for the
industrial park. An additional capital investment of approximately $45 million
would be required to expand the denim facility to 40 million yards including the
corresponding increase in yarn capacity. The funds required for the denim and
yarn facilities will require debt financing, which the Company has not arranged
at this date and there can be no assurance that such financing will be available
at acceptable terms and conditions.
The second priority for the use of cash flow and debt capacity is reinvestment
in existing manufacturing facilities. Reflecting this priority, the Company has
made capital expenditures of over $82 million from 1997 through 1999 to maintain
modern manufacturing facilities and to expand the jacquard plant. The Company
plans to reduce domestic capital spending to approximately $12 million in 2000.
SEGMENT INFORMATION
In the years 1997, 1998 and 1999, Cone operated in four principal business
segments: denim and khaki, commission finishing, decorative fabrics and
yarn-dyed products. (See Notes 18 and 21 to Notes to Consolidated Financial
Statements included in Part II, Item 8.)
RESULTS OF OPERATIONS
FIFTY-TWO WEEKS ENDED JANUARY 2, 2000 COMPARED WITH FIFTY-THREE WEEKS ENDED
JANUARY 3, 1999
For the year 1999, Cone Mills had sales of $616.3 million, down 15% from sales
of $728.6 million for 1998, primarily due to a sales shortfall in denim. Lower
denim sales resulted from weaker consumer interest in jeans and adjustments to
retail and manufacturing inventories.
Gross profit for 1999 decreased to 7.8% of sales, as compared with 9.2% for the
previous year. Lower volume and pricing in denims and the aggressive elimination
of unprofitable lines and inventories more than offset the improved operating
results in commission finishing and decorative fabrics.
DENIM AND KHAKI. For 1999, denim and khaki segment sales were $448.5 million,
down 18% from 1998 sales of $545.0 million. Almost all of the sales shortfall
resulted from lower sales volume and prices for denims. Operating income of the
denim and khaki segment for 1999 was $17.6 million, or 4% of sales, compared
with
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<PAGE>
$52.2 million, or 10%, for 1998. The reduced margin and income resulted
primarily from lower sales volume, lower prices, reduced plant operating
schedules and closeouts on certain khaki inventories as the Company refocused
this product line. Operating income for the segment includes the equity in
earnings from the Parras Cone joint venture plant.
COMMISSION FINISHING. Outside sales (total segment sales less intersegment
sales) of the commission finishing segment, which consists of the Carlisle and
Raytex plants, were $76.3 million for 1999, down 14% from $88.9 million for
1998. In 1999, Carlisle did not compete in certain product segments due to
unsatisfactory prices and the anticipated recovery in print demand did not
materialize. For 1999, the operating loss was $6.9 million, an improvement of
55% from the loss of $15.1 million for 1998. As discussed earlier, during the
third quarter of 1999, the Company implemented a substantial restructuring,
downsizing and refocusing of the Carlisle Finishing plant. Intersegment sales of
this segment were to the denim and khaki and decorative fabrics segments.
DECORATIVE FABRICS. For 1999, sales of the decorative fabrics segment were $72.9
million, up 29% from sales of $56.3 million for 1998. Cone Jacquard's sales
improved as capacity expanded and John Wolf decorative fabrics sales improved.
The decorative fabrics segment had earnings of $1.6 million for 1999 compared
with a loss of $0.4 million for 1998. Results for 1999 were negatively impacted
by higher than expected start-up costs related to capacity additions at the
jacquard plant.
YARN-DYED PRODUCTS. The Company ceased manufacturing yarn-dyed products in May
1999. For 1999, sales of yarn-dyed products were $17.1 million, down from $33.7
million in 1998. For 1999, the yarn-dyed products segment had an operating loss
of $5.6 million, as compared with a loss of $14.5 million for 1998. Most of the
losses for this segment were reserved under the Company's restructuring plan.
Selling and administrative expenses for 1999 were $48.7 million, as compared
with $57.4 million in 1998. In both years, selling and administrative expenses
were 7.9% of sales. The lower dollar amount of selling and administrative
expenses in 1999 reflects the cost savings realized from restructuring
initiatives. Selling and administrative expenses for 1998 were restated to
conform to industry practices.
In 1999, the Company had $10.4 million of EBITDA defined as income (loss) from
operations before depreciation and amortization. However, excluding
restructuring charges, related expenses, inventory writedowns and operating
losses associated with businesses exited in 1999, the Company had $38.6 million
of EBITDA. For comparison, EBITDA for 1998 was $57.5 million.
Interest expense for 1999 was $14.5 million, down from $14.9 million for 1998.
Other expenses of $1.0 million recognized in 1999 were the ongoing expense of
the new accounts receivable securitization program, which began on September 1,
1999.
For 1999 and 1998, the income tax benefit as a percent of the taxable loss was
35% and 40%, respectively. (See Note 11 to Notes to Consolidated Financial
Statements included in Part II, Item 8.)
Equity in earnings of Parras Cone, the Company's joint venture plant in Mexico,
was $1.7 million for 1999, as compared with $5.2 million for 1998. In the 1999
period, the plant had lower capacity utilization, higher cotton costs as a
percentage of sales, and additional marketing and management fees paid to the
20
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joint venture partners.
For the year 1999, the Company had a net loss of $19.1 million, or $.87 per
share after preferred dividends. For comparison, in 1998, Cone had a net loss of
$6.7 million, or $.37 per share. However, both years included significant
pre-tax restructuring, related expenses and inventory write-downs connected with
the exit from businesses, all associated with a company-wide comprehensive
restructuring program. Excluding these special charges, losses from product
lines exited in 1999 and the $1.0 million after-tax charge from the cumulative
effect of an accounting change related to capitalized start-up costs at Parras
Cone, the Company had a pro forma net loss of $.18 per share in 1999. For
comparison, in 1998 after adjusting for restructurings, exit inventory charges
and losses from product lines exited in 1999, the Company had a pro forma net
income of $.37 per share.
FIFTY-THREE WEEKS ENDED JANUARY 3, 1999 COMPARED WITH FIFTY-TWO WEEKS ENDED
DECEMBER 28, 1997
Cone Mills had sales for 1998 of $728.6 million, as compared with 1997 sales of
$716.9 million. For 1998, sales of denim, commission finishing and decorative
fabrics improved while sales of yarn-dyed products were lower. In the fourth
quarter of 1998, denim sales slowed significantly.
Gross profit for 1998 increased to 9.2% of sales, as compared with 7.3% for the
previous year. The improvement was primarily the result of lower raw material
costs including cotton, dyes and chemicals. Cotton costs were lower in 1998,
reflecting more favorable world cotton prices and the U.S. government cotton
program.
DENIM AND KHAKI. For 1998, sales for this segment, primarily denims, were $545.0
million, up 2% from 1997 sales of $533.8 million. In the fourth quarter of 1998,
and in the first two quarters of 1997, operating schedules at the Company's
denim facilities were curtailed as certain customers reduced orders to control
inventories. Operating profits for the segment were $52.2 million, up 43% for
1998, as compared with $36.5 million for 1997. Lower raw material costs
including cotton, dyes and chemicals accounted for the increase. Prices of denim
and khaki fabrics were down slightly year-over-year as pricing in the fourth
quarter of 1998 weakened.
COMMISSION FINISHING. Outside sales (total segment sales less intersegment
sales) of commission finishing at the Raytex and Carlisle plants were $88.9
million, up 7% in 1998, as compared with $83.4 million for 1997. Sales
improvements were primarily the result of sales efforts to broaden the customer
base. The segment had an operating loss of $15.1 million for 1998, as compared
with an operating loss of $13.1 million in 1997. All of the 1998 losses were
associated with the Carlisle plant, where operations improved modestly
quarter-to-quarter during 1998. Intersegment sales of this segment were to the
denim and khaki and decorative fabrics segments.
DECORATIVE FABRICS. For 1998, sales of decorative fabrics were $56.3 million, up
32% from 1997 sales of $42.5 million. The segment had an operating loss of $0.4
million in 1998 compared with an operating loss of $9.7 million in 1997. Both
John Wolf and Cone Jacquards had improved operating results because of new
product offerings, expanded capacity and reduced overhead expenses.
YARN-DYED PRODUCTS. In 1998, sales of yarn-dyed products were $33.7 million,
down
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27%, as compared with $46.4 million for 1997. Unseasonably warm weather in 1998
affected retail sales. Continued import penetration also affected the Company's
sales. The Company had an operating loss for 1998 of $14.5 million in this
segment, as compared with an operating loss of $5.0 million for 1997. The loss
was primarily associated with operations and excess inventories at the Salisbury
plant.
Total Company selling and administrative expenses for 1998 were $57.4 million,
or 7.9% of sales, as compared with $55.6 million, or 7.8% of sales in 1997. The
increase was primarily from international initiatives, including the start-up
expenses related to the new alliance with Ashima in India, expenses and fees
associated with cost savings efforts and increases in certain sales staffs to
complement more aggressive sales efforts. Selling and administrative expenses
for 1998 and 1997 were restated to conform to industry practices.
Interest expense for 1998 was up $0.7 million, as compared to 1997, primarily
the result of additional borrowing to support increases in working capital.
For 1998 and 1997, the income tax benefit as a percent of the taxable loss was
40.0%. (See Note 11 to Notes to Consolidated Financial Statements included in
Item II, Part 8.)
Equity in earnings of Parras Cone, the joint venture plant in Mexico, was $5.2
million for 1998, as compared with $2.6 million for 1997. The 1998 results
reflect a fuller operating schedule compared with the 1997 period, improved
operating efficiencies and lower cotton costs.
Cone Mills had a net loss for 1998 of $6.7 million, or $.37 per share after
preferred dividends, as compared with a net loss of $9.4 million, or $.47 per
share for the prior year. Excluding restructuring charges, related expenses,
inventory write-downs and operating losses associated with businesses exited in
1999, the Company had a pro forma net income of $.37 per share in 1998, as
compared with a pro forma net loss of $.22 per share in 1997. Pre-tax charges of
$19.3 million in 1998 included $15.8 million for the write-down of property and
equipment at the Salisbury plant and $2.2 million for additional inventory
reserves on the yarn-dyed shirting product lines. In 1997, the Company incurred
pre-tax restructuring charges and inventory adjustments of $7.4 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal long-term capital components consist of debt outstanding
under its Senior Note, its 8-1/8% Debentures and stockholders' equity. Primary
sources of liquidity are internally generated funds, an $80 million Revolving
Credit Facility (under which $11 million was available on January 2, 2000) and a
new $50 million Receivables Purchase and Servicing Agreement (the "Receivables
Agreement") entered into on September 1, 1999 with Cone Receivables II LLC,
Redwood Receivables Corporation ("Redwood"), an affiliate of General Electric
Capital Corporation, and General Electric Capital Corporation. The new
Receivables Agreement will terminate in August 2004 and replaced a similar
facility with Delaware Funding Corporation.
Pursuant to the Receivables Agreement documents, the Company will sell or
contribute to Cone Receivables II LLC certain of their accounts receivable and
Cone Receivables II LLC will in turn sell to Redwood an undivided 100% ownership
interest in such receivables. Redwood will then issue commercial paper backed
by, among other things, Redwood's ownership interest in the receivables. The
sale
22
<PAGE>
price to Cone Receivables II LLC for the receivables will be subject to a
purchase discount equal to a percentage over Redwood's commercial paper interest
rate, which percentage may vary based upon the Company's operating performance.
At present, the percentage over the commercial paper rate is 1.00%.
During 1999, the Company generated cash from operations, before changes in
working capital, of $1.5 million, as compared with $22.3 million for 1998. In
the 1999 period, working capital increased by $8.1 million. Uses of cash in the
1999 period included $13.2 million for capital expenditures and $5.6 million for
the redemption of preferred stock.
On January 28, 2000, the Company entered into a new $80 million Revolving Credit
Facility with its existing banks with Bank of America, N.A., as agent. The
Revolving Credit Facility was secured by Company assets and will mature on
August 7, 2000. Interest rates were increased to market levels and new covenants
were set. (See Note 9 to Notes to Consolidated Financial Statements included in
Part II, Item 8.)
At the same time the Company entered into the new Revolving Loan Agreement, its
Senior Notes and 8-1/8% Debentures were ratably secured with the bank facility.
The Company believes that internally generated operating funds and funds
available under its credit facilities will be sufficient to meet its needs for
working capital and domestic capital spending under the terms of its revolving
credit facility. Liquidity is predicated on the Company meeting its operating
targets in 2000 and further reductions in inventories. By August 2000, the
Company must either refinance or replace the revolving credit facility. The
Company is in the process of exploring its alternatives related to financing its
business. These alternatives may include one or more of the following: (1) the
restructuring or replacing of the revolving credit facility; (2) an increase in
the accounts receivable securitization facility from $50 million to up to $60
million; and (3) funding from nontraditional sources of capital. While
management believes that it will be able to obtain the appropriate financings,
including those for its Mexican initiatives, there is no assurance that the
Company will be able to replace its revolving credit facility or otherwise
obtain financing on terms and conditions acceptable to the Company.
On January 2, 2000, the Company's long-term capital structure consisted of
$198.8 million of long-term debt (including current maturities) and $157.5
million of stockholders' equity. For comparison, on January 3, 1999, the Company
had $172.1 million of long-term debt and $181.9 million of stockholders' equity.
Long-term debt (including current maturities of long-term debt) as a percentage
of long-term debt and stockholders' equity was 56% at January 2, 2000, as
compared with 49% at January 3, 1999.
Accounts and note receivable on January 2, 2000, were $47.5 million, as compared
with $36.4 million at January 3, 1999. Receivables, including those sold
pursuant to the Receivables Purchase Agreement, represented 65 days of sales
outstanding at January 2, 2000 and 56 days at January 3, 1999. The increase in
days of sales outstanding primarily reflects a change in customer sales mix with
fewer customers paying in advance of due date.
Inventories on January 2, 2000, were $110.6 million, down $9.8 million from
$120.4 million of inventories at January 3, 1999. The Company continues to
curtail operating schedules to control denim inventories and to liquidate
inventories associated with businesses which it has exited.
23
<PAGE>
For 1999, capital spending was $13.2 million compared to $32.8 million for 1998.
Domestic capital spending in 2000 is expected to be approximately $12 million.
At January 2, 2000, the Company had committed $1.6 million to capital projects.
In addition to the 1999 domestic capital spending budget, the Company expects to
spend approximately $8 million for investments in international initiatives.
OTHER MATTERS
During 1999, the Company implemented a comprehensive plan to address possible
exposures to Year 2000 issues. To date, the Company has not experienced any
major disruptions to its business nor is it aware of any major Year 2000 related
disruptions impacting other entities with which it interacts, both domestically
and globally, including suppliers, customers and financial service
organizations. The Company will continue to monitor its critical financial,
operational and manufacturing systems, as well as customers and suppliers,
during 2000 but does not anticipate any significant Year 2000 related issues.
The costs incurred to address the Company's Year 2000 issues were less than $1.0
million.
Federal, state and local regulations relating to the workplace and the discharge
of materials into the environment continue to change and, consequently, it is
difficult to gauge the total future impact of such regulations on the Company.
Existing government regulations are not expected to cause a material change in
the Company's competitive position, operating results or planned capital
expenditures. The Company has an active environmental committee, which fosters
protection of the environment and compliance with laws.
The Company is a party to various legal claims and actions. Management believes
that none of these claims or actions, either individually or in the aggregate,
will have a material adverse effect on the financial condition of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's primary market risk exposures are cotton (commodity) price risk
and interest rate risk. At January 2, 2000, Cone had no material exchange rate
risk. The Company had no financial instruments, derivative financial instruments
or derivative commodity instruments held for trading purposes at January 2,
2000. Fair values for cotton derivatives and long-term debt instruments were
estimated with reference to market quotes at year-end.
Commodity price risk primarily relates to cotton. The Company has an established
cotton purchasing program, administered in conformance with policies approved by
the Board of Directors, to ensure an uninterrupted supply of appropriate quality
and quantities of cotton, to hedge committed and anticipated fabric sales, and
to manage margin risks associated with price fluctuations on anticipated cotton
purchases. The Company primarily uses forward contracts and, to a lesser extent,
futures and options contracts.
The following table provides information about the Company's cotton inventory
options contracts that are sensitive to changes in cotton prices. The table
presents the number of contracts, the weighted-average strike price and the
total dollar contract price by expected maturity dates. Contract amounts are
used to calculate the contractual payments and quantity of cotton under option
at January 2, 2000 and January 3, 1999.
24
<PAGE>
<TABLE>
<CAPTION>
Expected Expected
Maturity Fair Maturity Fair
Date 2000 Value Date 1999 Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COTTON OPTIONS (PUTS)
Contract Volume
(100 bales per contract) 396 NA 642 NA
Weighted-Average Strike Price (per lb.;
500 lbs. per bale avg.) $ .55 NA $ .61 NA
Contract Amount $ 266,625 $ 572,660 $ 406,700 $ 874,200
COTTON OPTIONS (CALLS)
Contract Volume
(100 bales per contract) 1,611 NA 778 NA
Weighted-Average Strike Price (per lb.;
500 lbs. per bale avg.) $ .53 NA $ .75 NA
Contract Amount $ 1,165,630 $ 794,385 $ 370,150 $ 117,510
</TABLE>
The Company's debt instruments are exposed to interest rate risk. Cone's
strategy is to balance its fixed to floating interest rate mix. The table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates. Variable weighted-average interest rates for the
Company's debentures are based on the applicable forward LIBOR rates.
25
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------------------------------------------------
There- Fair
(dollars in millions) 2000 2001 2002 2003 2004 after Total Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT
FIXED RATE
Senior Note $ 10.7 $ 10.7 $ 10.7 $ - $ - $ - $ 32.1 $ 31.5
Average interest rate (%) 10.9 11.0 11.0 - - - 11.0
VARIABLE RATE
Revolver $ 69.0 $ - $ - $ - $ - $ - $ 69.0 $ 69.0
Average interest rate (%) 10.5 - - - - - 10.5
Debentures (including an
interest rate swap) $ - $ - $ - $ - $ - $100.0 $100.0 $ 55.0
Average interest rate (%) 7.3 7.3 7.3 7.3 7.3 7.3 7.3
</TABLE>
"Safe Harbor" Statement under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Except for the historical information presented, the matters disclosed in the
foregoing discussion and analysis and other parts of this report include
forward-looking statements. These statements represent the Company's current
judgment on the future and are subject to risks and uncertainties that could
cause actual results to differ materially. Such factors include, without
limitation: (i) the demand for textile products, including the Company's
products, will vary with the U.S. and world business cycles, imbalances
between consumer demand and inventories of retailers and manufacturers and
changes in fashion trends, (ii) the highly competitive nature of the textile
industry and the possible effects of reduced import protection and free-trade
initiatives, (iii) the unpredictability of the cost and availability of
cotton, the Company's principal raw material, (iv) the Company's
relationships with Levi Strauss as its major customer, (v) the Company's
ability to attract and maintain adequate capital to fund operations and
strategic initiatives, (vi) increases in prevailing interest rates, and (vii)
the inability to achieve the cost savings associated with the Company's
restructuring initiatives. For a further description of these risks see "Item
1. Business -Competition, -Raw Materials and -Customers" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Overview" of Item 7. Other risks and uncertainties may be described from time
to time in the Company's other reports and filings with the Securities and
Exchange Commission.
26
<PAGE>
STATEMENT OF RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Cone Mills is responsible for the preparation and integrity of
the Company's published financial statements. The financial statements have been
prepared in accordance with generally accepted accounting principles and include
management's best estimates and judgment. Management has also prepared the other
information contained in this report and is responsible for its accuracy and
consistency with the financial statements.
The Company maintains a system of internal control over financial reporting,
which is designed to provide reasonable assurance to the Company's management
and Board of Directors regarding the preparation of reliable published financial
statements. The system includes a code of conduct to foster a strong ethical
climate, established policies and procedures, internal audit processes, and the
employment of qualified personnel. The Company has established formal criteria
against which the internal control system is measured and as of January 2, 2000,
the Company was in compliance with these criteria.
The Board of Directors, assisted by its Audit Committee which is composed
entirely of directors who are not officers or employees of the Company, provides
oversight to the financial reporting process. The Committee meets regularly with
management, internal auditors and independent certified public accountants to
review the scope and findings of audits, financial reporting issues and the
adequacy of the internal control system. To assure complete independence,
representatives of McGladrey & Pullen, LLP, Certified Public Accountants,
approved by the shareholders, have free access to the Audit Committee with or
without the presence of management.
/s/ John L. Bakane /s/ Gary L. Smith
John L. Bakane Gary L. Smith
PRESIDENT AND EXECUTIVE VICE PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
/s/ Christopher F. Conlon
Christopher F. Conlon
CONTROLLER
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MCGLADREY & PULLEN, LLP
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Cone Mills
Corporation and subsidiaries as of January 2, 2000 and January 3, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended January 2, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cone Mills
Corporation and subsidiaries as of January 2, 2000 and January 3, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 2000 in conformity with generally accepted
accounting principles.
As discussed in Note 22 to the consolidated financial statements, in 1999 the
Company changed its methods of accounting for start-up costs and costs of
computer software developed or obtained for internal use.
/s/ McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
Greensboro, North Carolina
February 11, 2000
28
<PAGE>
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended January 2, 2000, January 3, 1999 and December 28, 1997
(in thousands, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $616,321 $ 728,626 $ 716,853
Cost of Goods Sold 568,197 661,795 664,394
---------------------------------------------------
Gross Profit 48,124 66,831 52,459
Selling and Administrative 48,651 57,362 55,612
Restructuring and Impairment of Assets 16,017 17,124 5,176
---------------------------------------------------
Loss from Operations (16,544) (7,655) (8,329)
---------------------------------------------------
Other Income (Expense)
Interest income 1,529 2,777 2,486
Interest expense (14,450) (14,890) (14,160)
Other expense (993) - -
---------------------------------------------------
(13,914) (12,113) (11,674)
---------------------------------------------------
Loss before Income Tax Benefit, Equity in Earnings of Unconsolidated
Affiliate and Cumulative Effect of Accounting Change (30,458) (19,768) (20,003)
Income Tax Benefit (10,740) (7,907) (8,001)
---------------------------------------------------
Loss before Equity in Earnings of Unconsolidated Affiliate and Cumulative
Effect of Accounting Change (19,718) (11,861) (12,002)
Equity in Earnings of Unconsolidated Affiliate 1,684 5,210 2,637
---------------------------------------------------
Loss before Cumulative Effect of Accounting Change (18,034) (6,651) (9,365)
Cumulative Effect of Accounting Change (1,038) - -
---------------------------------------------------
Net Loss $(19,072) $ (6,651) $ (9,365)
---------------------------------------------------
Loss Available to Common Shareholders
Loss before Cumulative Effect of Accounting Change $(21,081) $ (9,564) $ (12,346)
Cumulative Effect of Accounting Change (1,038) - -
---------------------------------------------------
Net Loss $(22,119) $ (9,564) $ (12,346)
---------------------------------------------------
Loss Per Share - Basic and Diluted
Loss before Cumulative Effect of Accounting Change $ (0.83) $ (0.37) $ (0.47)
Cumulative Effect of Accounting Change (0.04) - -
---------------------------------------------------
Net Loss $ (0.87) $ (0.37) $ (0.47)
---------------------------------------------------
Weighted-Average Common Shares Outstanding
Basic 25,462 25,929 26,140
---------------------------------------------------
Diluted 25,462 25,929 26,140
---------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 2, 2000 and January 3, 1999
(in thousands, except share and par value data) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 1,267 $ 639
Accounts receivable, less allowances of $5,050; 1998, $1,500 47,531 26,010
Subordinated note receivable - 10,414
Inventories 110,613 120,430
Other current assets 6,149 10,253
----------------------------------
Total Current Assets 165,560 167,746
Investments in Unconsolidated Affiliates 46,815 45,489
Other Assets 38,964 36,616
Property, Plant and Equipment 221,458 238,666
----------------------------------
$472,797 $ 488,517
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ - $ 1,000
Current maturities of long-term debt 79,714 10,714
Accounts payable 26,849 27,255
Sundry accounts payable and accrued liabilities 33,866 42,071
Deferred income taxes 9,894 22,670
----------------------------------
Total Current Liabilities 150,323 103,710
Long-Term Debt 119,115 161,385
Deferred Income Taxes 33,916 30,050
Other Liabilities 11,958 11,448
Stockholders' Equity
Class A preferred stock - $100 par value; authorized 1,500,000 shares;
issued and outstanding 355,635 shares;
1998, 383,948 shares 35,564 38,395
Class B preferred stock - no par value; authorized
5,000,000 shares - -
Common stock - $.10 par value; authorized 42,700,000
shares; issued and outstanding 25,479,717 shares;
1998, 25,432,233 shares 2,548 2,543
Capital in excess of par 57,435 57,264
Retained earnings 70,776 92,799
Deferred compensation - restricted stock (321) (579)
Accumulated other comprehensive loss, currency translation adjustment (8,517) (8,498)
----------------------------------
Total Stockholders' Equity 157,485 181,924
----------------------------------
$472,797 $ 488,517
==================================
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended January 2, 2000,
January 3, 1999 and Class A Preferred Stock Common Stock
December 28, 1997 ----------------------------------- -----------------------------------
(in thousands, except share data) Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 29, 1996 383,948 $ 38,395 26,301,233 $ 2,630
Comprehensive Loss
Net loss - - - -
Currency translation adjustment - - - -
Total comprehensive loss
Class A Preferred Stock
Cash dividends paid - - - -
Common Stock
Purchase of common shares - - (201,700) (20)
Options exercised - - 12,600 1
Issuance of restricted shares - - 89,500 9
Restricted stock compensation - - - -
--------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1997 383,948 $ 38,395 26,201,633 $ 2,620
--------------------------------------------------------------------------
Comprehensive Loss
Net loss - - - -
Currency translation adjustment - - - -
Total comprehensive loss
Class A Preferred Stock
Cash dividends paid - - - -
Common Stock
Purchase of common shares - - (768,400) (77)
Restricted stock compensation - - - -
Cancellation of restricted shares - - (1,000) -
--------------------------------------------------------------------------
BALANCE, JANUARY 3, 1999 383,948 $ 38,395 25,432,233 $ 2,543
--------------------------------------------------------------------------
Comprehensive Loss
Net loss - - - -
Currency translation adjustment - - - -
Total comprehensive loss
Class A Preferred Stock
Shares redeemed (56,281) (5,628) - -
Cash dividends paid - - - -
Stock dividend 27,968 2,797 - -
Common Stock
Purchase of common shares - - (6,916) -
Options exercised - - 62,400 6
Issuance of restricted shares - - 10,000 1
Restricted stock compensation - - - -
Cancellation of restricted shares - - (18,000) (2)
--------------------------------------------------------------------------
BALANCE, JANUARY 2, 2000 355,635 $ 35,564 25,479,717 $ 2,548
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended January 2, 2000, Deferred Accumulated
January 3, 1999 and Capital in Compensation Other
December 28, 1997 Excess Retained Restricted Comprehensive
(in thousands, except share data) of Par Earnings Stock Loss Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 29, 1996 $ 62,995 $ 114,706 $ - $ (8,475) $ 210,251
Comprehensive Loss
Net loss - (9,365) - - (9,365)
Currency translation adjustment - - - (29) (29)
------------
Total comprehensive loss (9,394)
------------
Class A Preferred Stock
Cash dividends paid - (2,892) - - (2,892)
Common Stock
Purchase of common shares (1,512) - - - (1,532)
Options exercised 65 - - - 66
Issuance of restricted shares 752 - (761) - -
Restricted stock compensation - - 21 - 21
---------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1997 $ 62,300 $ 102,449 $ (740) $ (8,504) $ 196,520
---------------------------------------------------------------------------
Comprehensive Loss
Net loss - (6,651) - - (6,651)
Currency translation adjustment - - - 6 6
------------
Total comprehensive loss (6,645)
------------
Class A Preferred Stock
Cash dividends paid - (2,999) - - (2,999)
Common Stock
Purchase of common shares (5,028) - - - (5,105)
Restricted stock compensation - - 153 - 153
Cancellation of restricted shares (8) - 8 - -
---------------------------------------------------------------------------
BALANCE, JANUARY 3, 1999 $ 57,264 $ 92,799 $ (579) $ (8,498) $ 181,924
---------------------------------------------------------------------------
Comprehensive Loss
Net loss - (19,072) - - (19,072)
Currency translation adjustment - - - (19) (19)
------------
Total comprehensive loss (19,091)
------------
Class A Preferred Stock
Shares redeemed - - - - (5,628)
Cash dividends paid - (154) - - (154)
Stock dividend - (2,797) - - -
Common Stock
Purchase of common shares (45) - - - (45)
Options exercised 320 - - - 326
Issuance of restricted shares 47 - (48) - -
Restricted stock compensation - - 153 - 153
Cancellation of restricted shares (151) - 153 - -
---------------------------------------------------------------------------
BALANCE, JANUARY 2, 2000 $ 57,435 $ 70,776 $ (321) $ (8,517) $ 157,485
---------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended January 2, 2000, January 3, 1999 and December 28, 1997
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS
Net loss $(19,072) $ (6,651) $ (9,365)
Adjustments to reconcile net loss to cash provided by (used in) operations
Depreciation 24,663 27,697 25,948
Gain on divestitures - - (34)
Loss (gain) on sale and writedown of property, plant and equipment 2,541 12,182 (2,114)
Amortization 2,249 2,667 2,767
Deferred compensation expense - restricted stock 153 153 21
Equity in earnings of unconsolidated affiliate (1,684) (5,210) (2,637)
Cumulative effect of accounting change 1,038 - -
Change in operating assets and liabilities, excluding effect of business divestiture
Accounts receivable (21,521) (6,052) 28,415
Subordinated note receivable 10,414 13,428 (23,842)
Inventories 9,817 (4,767) 11,836
Other assets (68) 8,573 (2,905)
Accounts payable and accrued liabilities (6,704) (6,066) (2,440)
Deferred income taxes (8,910) (9,173) (1,840)
Other liabilities 510 667 448
---------------------------------------
Cash provided by (used in) operations (6,574) 27,448 24,258
---------------------------------------
INVESTING
Investments in unconsolidated entities (680) (3,498) (1,564)
Proceeds from business divestitures - - 19,529
Proceeds from sale of property, plant and equipment 3,198 6,162 4,995
Capital expenditures (13,194) (32,821) (36,290)
---------------------------------------
Cash used in investing (10,676) (30,157) (13,330)
---------------------------------------
FINANCING
Net payments under line of credit agreements (1,000) (3,500) (767)
Increase (decrease) in checks issued in excess of deposits (1,907) (7,190) 4,831
Principal payments on long-term debt (10,714) (10,714) (10,796)
Proceeds from long-term debt borrowings 37,000 32,000 -
Proceeds from issuance of common stock 326 - 66
Purchase of outstanding common stock (45) (5,105) (1,532)
Dividends paid - Class A Preferred (154) (2,999) (2,892)
Redemption of Class A Preferred stock (5,628) - -
---------------------------------------
Cash provided by (used in) financing 17,878 2,492 (11,090)
---------------------------------------
Net change in cash 628 (217) (162)
CASH AT BEGINNING OF YEAR 639 856 1,018
---------------------------------------
CASH AT END OF YEAR $ 1,267 $ 639 $ 856
---------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Cone Mills Corporation and all majority owned subsidiaries
(collectively, the "Company") except for Cone Receivables, LLC, which was a
special-purpose entity that was dissolved in the third quarter of 1999. All
significant intercompany transactions and balances have been eliminated in
consolidation.
FISCAL YEAR. The Company's fiscal year ends on the Sunday nearest December 31.
Fiscal years 1999 and 1997 each contained 52 weeks. Fiscal year 1998 contained
53 weeks.
INVENTORIES. Inventories are stated at the lower of cost or market. The last-in,
first-out (LIFO) method is used to determine cost of most domestically produced
goods. The first-in, first-out (FIFO) or average cost methods are used to
determine cost of all other inventories.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES. Investments in unconsolidated
affiliated companies are accounted for by both the equity and cost methods,
depending upon ownership levels. The Company's equity in earnings and currency
translation adjustments may be recorded on up to a one-quarter delay basis.
OTHER ASSETS. Other assets consist primarily of the excess of cost over net
assets acquired and trade names, which are carried at cost less accumulated
amortization. Costs are amortized using the straight-line method over the
estimated useful lives of the related assets, not exceeding twenty years.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is carried at cost.
Depreciation is computed by the straight-line method for financial reporting
purposes over the following estimated useful lives:
Buildings 15-39 Years
Machinery and Equipment 10-20 Years
Other 3-20 Years
IMPAIRMENT OF ASSETS. Impairments of long-lived assets used in operations or to
be disposed of are recorded as losses by the Company when the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. See Note 21, "Restructuring, Impairment of Assets and
Divestiture," of the Notes to the Consolidated Financial Statements.
DEFERRED INCOME TAXES. Deferred income taxes are provided on the difference
between the financial reporting and the income tax basis of assets and
liabilities, principally inventories, and property, plant and equipment. Balance
sheet classification of these deferred income taxes is based upon the
classification of the related assets or liabilities that created the temporary
differences and does not necessarily reflect the expected timing of the
reversals.
United States income taxes are not provided on the earnings of foreign
affiliates as those are intended to be permanently reinvested in the country
from which they
33
<PAGE>
were derived. Undistributed earnings of such foreign affiliates were
approximately $5 million at January 2, 2000.
CAPITAL STOCK REDEEMED. Redemption of capital stock is accounted for by the par
value method. Excess of redemption price over par value for Class A Preferred
Stock is charged to retained earnings. Excess of purchase price over par value
for common stock is charged to capital in excess of par applicable to common
shares and to retained earnings thereafter.
REVENUE RECOGNITION. Revenue from product sales is recognized at the time
ownership of the goods transfers to the customer.
RECLASSIFICATION OF SELLING AND ADMINISTRATIVE. In the first quarter of 1999,
the Company changed the criteria for items to be included in selling and
administrative expenses to conform to prevailing industry practices. The
Company's consolidated statements of operations have been restated to reflect
the new classification criteria. This resulted in the reclassification of $26.3
million and $22.7 million of selling and administrative expenses to cost of
goods sold for 1998 and 1997, respectively.
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. SECURITIZATION OF ACCOUNTS RECEIVABLE
Funds generated by the sale of receivables in the U.S. are provided through Cone
Receivables II LLC ("CRIILLC"). CRIILLC's sole business is the ongoing purchase
and subsequent resale of certain trade receivables from Cone Mills Corporation.
CRIILLC sells an undivided 100% ownership interest in these receivables under an
agreement (the "Accounts Receivable Facility") with Redwood Receivables
Corporation ("Redwood"), whose purchases yield proceeds of up to $50 million at
any point in time. Redwood issues commercial paper backed by, among other
things, Redwood's ownership interest in the receivables. CRIILLC is a separate
corporate entity with its own separate creditors who, in the event of its
liquidation, will be entitled to be satisfied out of CRIILLC's assets prior to
any value in CRIILLC becoming available to the Company. The Accounts Receivable
Facility expires in August 2004.
Under the securitization agreements, the sale price to CRIILLC for the
receivables is subject to a purchase discount equal to a percentage over
Redwood's commercial paper interest rate, which percentage may vary based upon
the Company's operating performance. At present, the percentage over the
commercial paper rate is 1.00%. As of January 2, 2000, the total amount
outstanding under the Accounts Receivable Facility was $49.0 million. Expenses
incurred in connection with the sale of accounts receivable for the year ended
January 2, 2000, were $993,000 and were recorded as other expense.
In 1998, securitization of accounts receivable was handled through Cone
Receivables, LLC ("CRLLC"), a wholly owned subsidiary of Cone Mills Corporation.
CRLLC was a qualifying special-purpose entity that was not a consolidated
subsidiary. The Company had sold CRLLC accounts receivable of $63 million at
fiscal year end 1998. The Company's subordinated note receivable from CRLLC was
34
<PAGE>
$10 million at fiscal year end 1998.
NOTE 3. INVENTORIES
(in thousands) 1999 1998
--------- ------
Greige and finished goods $ 78,973 $ 87,087
Work in process 4,821 9,810
Raw materials 15,523 11,508
Supplies and other 11,296 12,025
------- -------
$ 110,613 $ 120,430
------- -------
Inventories valued at LIFO as of January 2, 2000 and January 3, 1999 represented
97% of total inventories. If current replacement cost had been used for valuing
financial statement inventories, that portion of the inventories based on the
LIFO method would have been approximately $18 million higher at January 2, 2000
and $22 million higher at January 3, 1999. LIFO inventories valued for financial
statement purposes exceed their income tax basis by approximately $72 million at
January 2, 2000 and $79 million at January 3, 1999. During 1999, 1998 and 1997,
certain inventory quantities were reduced, resulting in a liquidation of LIFO
inventory layers carried at the lower costs prevailing in prior years. The
effect of these liquidations decreased net losses by $0.5 million in 1999 and by
less than $0.1 million in 1998 and 1997.
NOTE 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has a 15% ownership interest in Compania Industrial de Parras S.A.,
("CIPSA"), a denim manufacturer in Mexico. The Company and CIPSA formed a
company, Parras Cone de Mexico, S.A., ("Parras Cone"), to build and operate a
denim manufacturing facility in Parras, Mexico. Parras Cone is capitalized with
approximately $70 million of equity, each shareholder with a 50% interest, and
approximately $40 million of Mexican bank financing. The debt is not guaranteed
by Cone Mills Corporation or CIPSA.
The Company's equity in earnings of Parras Cone was $0.7 million (which includes
the cumulative effect of an accounting change expense of $1.0 million), $5.2
million and $2.6 million for 1999, 1998 and 1997, respectively. The summarized
unaudited financial information of Parras Cone is set forth below:
35
<PAGE>
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Current assets $ 26,180 $ 24,508 $ 18,332
Noncurrent assets 87,186 96,272 103,611
Current liabilities 18,901 15,383 13,218
Noncurrent liabilities 25,961 38,697 51,531
Net sales 74,964 85,225 84,849
Gross profit 11,933 22,163 15,827
Net income 1,312 10,069 5,396
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) 14,584 27,075 20,434
<CAPTION>
NOTE 5. OTHER ASSETS
(in thousands) 1999 1998
------ -----
<S> <C> <C>
Excess of cost over net assets acquired $ 19,693 $ 19,693
Trade names 14,325 14,332
Other intangible assets 3,892 5,075
------ ------
37,910 39,100
Less accumulated amortization 10,188 9,413
------ ------
27,722 29,687
Other assets 11,242 6,929
------ ------
$ 38,964 $ 36,616
------ ------
<CAPTION>
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
(in thousands) 1999 1998
------ -----
<S> <C> <C>
Land $ 10,921 $ 11,395
Buildings 88,436 88,394
Machinery and equipment 329,403 335,797
Other 39,065 34,240
------- -------
467,825 469,826
Less accumulated depreciation 246,367 231,160
------- -------
$ 221,458 $ 238,666
------- -------
</TABLE>
NOTE 7. NOTES PAYABLE
The Company had outstanding unsecured short-term notes payable of $1.0 million
at a weighted-average interest rate of 6.25% at fiscal year end 1998.
NOTE 8. SUNDRY ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
(in thousands) 1999 1998
------ -----
<S> <C> <C>
Accrued salaries, wages and commissions $ 6,469 $ 13,261
Checks issued in excess of deposits 8,902 10,809
Other 18,495 18,001
------ ------
$ 33,866 $ 42,071
------ ------
</TABLE>
36
<PAGE>
NOTE 9. LONG-TERM DEBT
(in thousands) 1999 1998
------- ------
Senior Note $ 32,144 $ 42,858
Revolving Credit Agreement 69,000 32,000
8-1/8% Debentures 97,685 97,241
------- -------
198,829 172,099
Less current maturities 79,714 10,714
------- -------
$ 119,115 $ 161,385
------- -------
The Senior Note is a ten-year $75 million Promissory Note, dated August 13, 1992
with an interest rate of 8.75% for 1999 which increased from 8% in February
1998. The interest rate on the Senior Note was increased to 11% on January 28,
2000. Annual principal payments of $10.7 million began August 1996 with the
remaining principal amount due August 2002. In August of 1997, the Company
signed a three-year $80 million Revolving Credit Agreement (the "Prior Credit
Agreement"). Borrowings under the Prior Credit Agreement were based upon current
quoted rates, as determined by either the prime rate, CD rate, or LIBOR, at the
Company's option or through a competitive bid. The weighted-average interest
rate on the borrowings under the Prior Credit Agreement was 8.8% at January 2,
2000. The Prior Credit Agreement and the Senior Note Agreement contain certain
covenants regarding the operations and financial condition of the Company. The
Company did not comply with certain financial covenant requirements for which
the Company received waivers through January 28, 2000. These financial covenants
were replaced on January 28, 2000, in connection with the replacement of the
Prior Credit Agreement described below.
On March 15, 1995, the Company completed the sale of $100 million 8-1/8%
Debentures through an underwritten public offering. The Debentures are due March
15, 2005, and are not redeemable prior to maturity. Interest is payable
semiannually each March 15 and September 15. In 1995, the Company entered into
an interest rate hedge contract to fix the interest rate on the Debentures. The
contract was terminated at a cost of $4.3 million. Amortization of the loss on
the interest rate hedge and original issue discount, both over a ten-year life,
resulted in an 8.57% effective rate for the issue.
In July 1998, the Company entered into an interest rate swap agreement with a
notional amount of $100 million and a term of seven years with a major financial
institution. This agreement effectively converts the Debentures to a variable
interest rate. The interest rate under the swap agreement is reset every six
months and the effective rate at January 2, 2000 was 7.29%. The interest rate
swap agreement also provides an effective interest rate cap of 8.57% for the
first three years and then to 10.07% for the balance of its term.
On January 28, 2000, the Company entered into a new Revolving Credit Agreement
("New Credit Agreement") with a group of major financial institutions which
replaced the Prior Credit Agreement. Borrowings are collateralized by
substantially all of the assets of the Company. In connection with the New
Credit Agreement, the Company also granted equal and ratable liens on the same
assets to secure the Senior Note, the 8-1/8% Debentures, the interest rate swap
agreement described above and the Company's synthetic lease of its headquarters.
The New Credit Agreement provides for a maximum line of credit of $80 million,
including a letter of credit facility of up to $10 million for the issuance of
standby and commercial letters of credit. The maximum amount that can be
borrowed
37
<PAGE>
is based on the borrowing base as specified in the New Credit Agreement. The New
Credit Agreement also provides for an overadvance basket of up to $5 million
over the borrowing base amount. The New Credit Agreement has a maturity date of
August 7, 2000. Direct borrowings under the New Credit Agreement may be made in
the form of Base Rate or Eurodollar Rate Loans, at the option of the Company.
Base Rate Loans bear interest at the rate per annum equal to the sum of (a) the
higher of (i) the Federal Funds Rate (as defined) for such day plus one-half of
one percent (0.5%) and (ii) the Prime Rate (as defined) for such day plus (b)
1.75%. Eurodollar rate loans bear interest at the Eurodollar rate plus 4.25%.
The New Credit Agreement contains certain financial covenants, including but not
limited to minimum levels of consolidated net worth, maintenance of certain
ratios including consolidated leverage and consolidated interest coverage
ratios, minimum required Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") and limitations on capital expenditures.
Annual maturities of long-term debt, consisting of amortization of the Senior
Note and the expiration of the Revolving Credit Agreement, for each of the next
five fiscal years are: (in thousands)
2000 $ 79,714
2001 10,714
2002 10,716
2003 -
2004 -
NOTE 10. PENSIONS AND OTHER BENEFIT PROGRAMS
The Company offers several qualified pension and other postretirement benefit
plans to its employees. The benefit plans offered by the Company include Defined
Contribution Retirement Plans, Defined Benefit Plans and Other Retiree Benefits
as outlined below:
DEFINED CONTRIBUTION RETIREMENT PLANS
The Company presently has three defined contribution plans as outlined below:
1. The 1983 Employee Stock Ownership Plan ("ESOP")
2. The 401(k) Program Plan (formerly known as The Supplemental Retirement
Plan ("SRP"))
3. The 401(k) Program Plan-Hourly (formerly known as the Supplemental
Retirement Plan-Hourly ("SRP-H"))
The Company discontinued contributions to the ESOP after 1992. The ESOP is
subject to a floor-offset arrangement in conjunction with the Company's defined
benefit plans with respect to pension benefits earned for service after 1983.
Under the floor-offset arrangement, retirement benefits earned after 1983 under
the Company's three defined benefit plans are offset by the actuarial equivalent
pension value of a portion of participants' ESOP accounts.
Participants of the 401(k) plans may contribute from 2% to 15% of their annual
compensation. The Company makes matching contributions of 40%. The Company does
not match employee contributions in excess of 6% of the employee's annual
compensation.
Expenses for the defined contribution plans were $1.6 million each year for both
1999 and 1998 and $1.5 million for 1997.
38
<PAGE>
DEFINED BENEFIT PLANS
The Company maintains noncontributory defined benefit pension plans covering
substantially all employees. The Company's funding policy is to make annual
contributions of amounts that are deductible for income tax purposes. Assets of
the pension plans at the end of 1999 were 48% invested in fixed income
securities consisting of bond funds and short-term money market or cash
equivalent funds, while the remaining 52% were invested in an equity fund.
OTHER RETIREE BENEFITS
The Company provides postretirement health care benefits to certain retired
employees between the ages of 55 and 65 who have completed ten years of service.
The plan is contributory, with the retiree contributions and plan design
adjusted periodically to reflect changes in health care costs.
39
<PAGE>
The following chart summarizes the balance sheet impact, as well as the benefit
obligations, assets, funded status and weighted-average rate assumptions related
to the Defined Benefit Plans and Other Retiree Benefits:
<TABLE>
<CAPTION>
DEFINED OTHER
BENEFIT PLANS RETIREE BENEFITS
-----------------------------------------------------------
(in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 69,518 $ 62,139 $ 3,246 $ 3,309
Service cost 3,420 3,629 123 123
Interest cost 4,866 4,371 227 211
Curtailment (473) - - -
Participants' contributions - - 335 331
Actuarial loss (gain) (6,867) 1,403 (170) (288)
Benefit payments (3,267) (2,024) (558) (440)
------------------------------------------------------------
Benefit obligation at end of year $ 67,197 $ 69,518 $ 3,203 $ 3,246
============================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 53,743 $ 43,391 $ - $ -
Actual return on plan assets 3,884 5,684 - -
Employer contributions 7,343 6,692 223 109
Participant's contributions - - 335 331
Benefit payments (3,267) (2,024) (558) (440)
------------------------------------------------------------
Fair value of plan assets at end of year $ 61,703 $ 53,743 $ - $ -
============================================================
FUNDED STATUS
Funded status at end of year $ (5,494) $ (15,775) $ (3,203) $ (3,246)
Unrecognized net actuarial loss (gain) 14,441 23,462 (515) (344)
Unrecognized prior service income (13) (207) - -
Unrecognized transition amount 295 484 1,485 1,599
------------------------------------------------------------
Net amount recognized $ 9,229 $ 7,964 $ (2,233) $ (1,991)
------------------------------------------------------------
Prepaid benefit cost $ 13,330 $ 11,544 $ - $ -
Accrued liability (5,359) (5,430) (2,233) (1,991)
Intangible asset 1,258 1,850 - -
------------------------------------------------------------
Net amount recognized $ 9,229 $ 7,964 $ (2,233) $ (1,991)
------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 8.0% 7.0% 7.0% 7.0%
Expected rate of return on plan assets 8.0% 8.0% NA NA
Rate of compensation increase 4.8% 4.8% NA NA
</TABLE>
The aggregate projected benefit obligations and fair value of assets for defined
benefit plans with projected benefit obligations in excess of assets for the
respective years were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligations $ 57,620 $ 60,756
Plan assets 50,749 44,009
</TABLE>
The Company's nonqualified pension plan was the only pension plan with an
accumulated obligation in excess of the fair value of plan assets. There are no
plan assets due to the nature of the plan. Accumulated benefit obligations for
this plan were $5.4 million for both 1999 and 1998.
The following table provides the components of net periodic benefit cost for
fiscal years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
DEFINED BENEFIT PLANS OTHER RETIREE BENEFITS
--------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 3,420 $ 3,629 $ 3,273 $ 123 $ 123 $ 137
Interest cost 4,866 4,371 3,688 227 211 216
Expected return on plan assets (4,199) (3,458) (2,686) - - -
Curtailment 572 - - - - -
Amortization of prior service income (29) (47) (47) - - -
Amortization of transition amount 136 146 146 114 114 114
Recognized net actuarial loss 1,313 1,708 1,393 - - -
--------------------------------------------------------------------------------------
Net periodic benefit cost $ 6,079 $ 6,349 $ 5,767 $ 464 $ 448 $ 467
======================================================================================
</TABLE>
The Company recorded a $572,000 curtailment loss in 1999 as a result of the
reduction in employees and closing of plants in the 1999 Restructuring Program
(see Note 21 to the Consolidated Financial Statements).
For measurement purposes, a 7.0% annual rate of increase in per capita health
care cost of covered benefits was assumed for 2000, with such rate of increase
gradually declining to 5.5% in 2003. A one-percentage point change in assumed
health care cost trend rates would have the following effects on 1999:
<TABLE>
<CAPTION>
(in thousands) 1% Increase 1% Decrease
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $ 42 $ 51
Effect on post-retirement benefit obligation 311 273
- ---------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
NOTE 11. INCOME TAX BENEFIT
The following tables present the components of the income tax provision
(benefit), a reconciliation of the U.S. statutory income tax benefit to the
actual income tax benefit, and the components and items comprising net deferred
tax liability.
COMPONENTS OF INCOME TAX PROVISION (BENEFIT)
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------
(in thousands) CURRENT DEFERRED TOTAL Current Deferred Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal $ (2,036) $ (8,229) $ (10,265) $ 1,081 $ (9,009) $ (7,928)
State, local and foreign 206 (681) (475) 185 (164) 21
---------------------------------------------------------------------------------------------
$ (1,830) $ (8,910) $ (10,740) $ 1,266 $ (9,173) $ (7,907)
---------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1997
---------------------------------------------
(in thousands) Current Deferred Total
- ------------------------------ --------------------------------------------
Federal $ (6,351) $ (1,596) $ (7,947)
State, local and foreign 190 (244) (54)
---------------------------------------------
$ (6,161) $ (1,840) $ (8,001)
---------------------------------------------
- ------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
RECONCILIATION OF INCOME TAX BENEFIT
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Statutory U.S. tax $ (10,434) $ (5,096) $ (6,078)
State income tax benefit, net of federal tax (559) (92) (50)
Tax benefit from foreign sales corporation - (1,450) (1,239)
Foreign affiliates earnings with no U.S. tax effect (164) (1,488) (614)
Other 417 219 (20)
------------------------------------------
$ (10,740) $ (7,907) $ (8,001)
------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
COMPONENTS OF NET DEFERRED INCOME TAX LIABILITY
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Deferred income tax liabilities $ 81,446 $ 81,239 $ 78,039
Deferred income tax assets (37,636) (28,519) (16,146)
-----------------------------------------
$ 43,810 $ 52,720 $ 61,893
-----------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
ITEMS COMPRISING NET DEFERRED INCOME TAX LIABILITY
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Property, plant & equipment - principally depreciation $ 42,461 $ 39,029 $ 39,778
Alternative minimum tax credit (7,745) (7,707) (2,710)
Inventories 24,505 27,921 29,018
Net operating loss carryforward (10,728) (2,023) -
Other - net (4,683) (4,500) (4,193)
-----------------------------------------
$ 43,810 $ 52,720 $ 61,893
-----------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
As of January 2, 2000, the Company has available for income tax purposes
approximately $30.7 million in federal net operating loss carryforwards which
may be used to offset future taxable income. These loss carryforwards expire in
fiscal years 2018 and 2019. The Company also has alternative minimum tax credit
carryforwards of $7.7 million which are available to reduce future regular
income taxes over an indefinite period.
41
<PAGE>
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
(in thousands) 1999 1998 1997
---- ---- ----
Cash Payments For:
Interest $ 13,815 $ 15,067 $ 14,579
------ ------ ------
Income tax refunds $ (844) $ (6,872) $ (3,188)
------ ------ ------
Receivable Recorded From Divestiture $ - $ - $ 270
------ ------ ------
Details of Divestiture:
Inventories $ 12,034
Property, plant and equipment 6,262
Other 1,199
Gain 34
------
$ 19,529
========
NOTE 13. CAPITAL STOCK
All Class A Preferred Stock is held by the Company's 1983 Employee Stock
Ownership Plan ("ESOP") except shares held by a former participant who elected
to receive shares in a distribution of account balances. Class A Preferred Stock
is nonvoting, except as otherwise required by law, and is senior in dividend
preference to all other classes of capital stock. Class A Preferred Stock has a
liquidation preference senior to all other classes of capital stock of $100 per
share plus accrued and unpaid dividends.
Holders of Class A Preferred Stock are entitled to receive dividends on the 31st
day of March of each year from funds legally available therefor when, as and if
declared by the Board of Directors. The dividend rate is established as of April
1 for the succeeding dividend period and is determined by an independent
investment bank or appraisal firm selected by the Board of Directors, subject to
confirmation by the ESOP trustee. The dividend rate is determined annually and
is that rate required to make the fair market value of Class A Preferred Stock
equal to its original par value. The dividend rate cannot exceed 13% per annum
or be less than 7% per annum. Dividends on Class A Preferred Stock are
cumulative, but accumulated dividends do not bear interest. Dividend rates
declared for Class A Preferred Stock were 8.0%, 7.50% and 7.85%, respectively
for the dividend periods ending March 31, 2000, 1999 and 1998.
Dividends on the Class A Preferred Stock are, at the option of the Board of
Directors, paid in cash or by delivery of shares of the Company's Class A
Preferred Stock, Common Stock or by delivery of other "qualifying employer
securities" of the Company as that term is used, on the date of such delivery,
in Section 407 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (or the corresponding section of any future law) or by a
combination of the foregoing; provided, however, that on the date of delivery
the fair market value of any stock or qualifying employer securities used to pay
dividends shall be equal to or greater than the amount of dividends paid
therewith. All dividends paid to date on the Class A Preferred Stock have been
paid in additional shares of Class A Preferred Stock or cash.
Class A Preferred Stock held by the 1983 ESOP may be redeemed, in whole or in
part, at the option of the Company by a vote of the Board of Directors, at a
price equal to the greater of $100 per share or the fair market value thereof,
42
<PAGE>
plus dividends accrued and unpaid thereon to the date fixed for redemption. The
redemption price shall be paid in cash or by delivery of shares of the Company's
Class A Preferred Stock, Common Stock or by delivery of other qualifying
employer securities or a combination of the foregoing, at the Company's option;
provided, however, that on the date of delivery the fair market value of any
stock or other qualifying employer securities used to pay the redemption price
shall be equal to or greater than the redemption price (or portion thereof) paid
therewith. The fair market value of Class A Preferred Stock for redemption
purposes was determined to be $100.00 per share at January 2, 2000.
Purchases of Class A Preferred Stock by the ESOP may be necessary to provide all
or part of the pension due under the Company's defined benefit plans pursuant to
the floor-offset arrangement in connection with the ESOP and to make
distributions due to retired or terminated employees. The ESOP is obligated to
purchase shares of Class A Preferred Stock from participants and former
participants of these plans in accordance with the terms and conditions of the
plans, the trust agreements and liquidity agreements thereunder. To the extent
the ESOP has insufficient liquidity to make these purchases, it may require the
Company to repurchase shares of Class A Preferred Stock. It is within the
control of the Company to satisfy the liquidity needs of the ESOP through cash
contributions, cash dividends or optional repurchases of the Class A Preferred
Stock.
The Company is authorized to issue Class B Preferred Stock but it has no Class B
Preferred Stock outstanding nor does it have present plans to issue such shares.
The Restated Articles of Incorporation provide that the Board of Directors may
determine the preferences, limitations and relative rights of the Class B
Preferred Stock, including voting rights, which could adversely affect the
voting rights of holders of Common Stock. Any Class B Preferred Stock which is
authorized and issued shall be junior to Class A Preferred Stock in accordance
with the terms of the Restated Articles of Incorporation.
Holders of Common Stock are entitled ratably, share for share, to dividends,
when, as and if declared by the Board of Directors, out of funds legally
available. Common Stock is junior to Class A Preferred Stock with respect to
dividend preference and may be junior to Class B Preferred Stock depending upon
the relative preferences, limitations and relative rights the Board of Directors
may determine upon issuance of such Class B Preferred Stock.
The Common Stock is junior in liquidation preference to the Class A Preferred
Stock and may be junior to the Class B Preferred Stock depending upon the
relative preferences, limitations and rights the Board of Directors may
establish upon issuance of Class B Preferred Stock. After payment in liquidation
has been made to the senior capital stock, the remaining assets of the Company
would be distributed pro rata among the holders of Common Stock equally on a per
share basis. Holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of holders of Common Stock.
On October 14, 1999, the Company's Board of Directors amended the Company's
Restated Articles of Incorporation creating a series of Class B Preferred Stock
(the "Class B Preferred Stock (Series A)"). The number of shares constituting
the Class B Preferred Stock (Series A) is 500,000. The Class B Preferred Stock
(Series A) is junior to the Class A Preferred Stock and senior to Common Stock
in dividends or distributions of assets upon liquidation, dissolution or winding
up of the Company. Dividends on the Class B Preferred Stock (Series A) are
cumulative and accrue from the quarterly dividend payment date. Each share of
43
<PAGE>
Class B Preferred Stock (Series A) entitles the holder thereof to 100 votes on
all matters submitted to a vote of shareholders of the Company. These shares
were reserved under the Shareholder Rights Plan.
On October 14, 1999, the Company's Board of Directors adopted a new Shareholder
Rights Plan (the "Plan"). Under the terms of the Plan, Company common stock
acquired by a person or a group buying 20% or more of the Company's common stock
would be diluted, except in transactions approved by the Board of Directors.
Under the terms of the Plan the Company's Board of Directors declared a dividend
distribution of one right (a "Right") for each outstanding share of the
Company's common stock paid on November 1, 1999, to shareholders of record at
the close of business on October 25, 1999. Each Right entitles the registered
holder to purchase from the Company a unit (a "Unit") consisting of one
one-hundredth of a share of Class B Preferred Stock (Series A) at a purchase
price of $30 per Unit. Under the Plan, the Rights detach and become exercisable
upon the earlier of (i) ten days following public announcement that a person or
group of affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the outstanding shares of the
Company's common stock, or (ii) ten business days following the commencement of,
or first public announcement of the intent of a person or group to commence, a
tender offer or exchange offer that would result in a person or group
beneficially owning 20% or more of such outstanding shares of the Company's
common stock. The exercise price, the kind and the number of shares covered by
each right are subject to adjustment upon the occurrence of certain events
described in the Plan.
If the Company is acquired in a merger or consolidation in which the Company is
not the surviving corporation, or the Company engages in a merger or
consolidation in which the Company is the surviving corporation and the
Company's common stock is changed or exchanged, or more than 50% of the
Company's assets or earning power is sold or transferred, the Rights entitle a
holder (other than the acquiring person or group) to buy, at the exercise price,
stock of the acquiring Company having a market value equal to twice the exercise
price. Following an acquisition by any person or group of 20% or more of the
Company's common stock, but prior to the acquisition by such person or group of
50% or more of the outstanding common stock, the Company's Board of Directors
may exchange the Rights (other than the Rights owned by such person or group),
in whole or in part, at an exchange ratio of one share of the Company's common
stock, or one one-hundredth of a share of Preferred Stock, per Right.
The Rights expire on October 13, 2009, and are redeemable upon action by the
Board of Directors at a price of $.01 per right at any time before they become
exercisable.
44
<PAGE>
NOTE 14. STOCK PLANS
The Company's 1984 Stock Option Plan provided for the granting of options to
purchase 5,000,000 shares of Common Stock. Options granted pursuant to the plan
were nonqualified stock options with a term of ten years, and included income
tax reimbursement in accordance with the terms of the plan. All options granted
under this plan which are outstanding are exercisable as of January 2, 2000. No
additional grants may be made under the 1984 Plan.
The Company has in effect the 1992 Amended and Restated Stock Plan that permits
the granting of options to purchase up to 2,000,000 shares of Common Stock.
Options granted may be incentive stock options or nonqualified stock options.
Option grants under this plan have a term of ten years and an exercise price
equal to the market price of the Company's common stock on the date of grant.
The 1992 Amended and Restated Stock Plan also permits the granting of an
aggregate of 200,000 shares of common stock as restricted stock or performance
shares in lieu of options.
Incentive stock options were granted in 1993, and nonqualified stock options
with a tax reimbursement feature were granted in 1996 and 1994. In 1999, 1998
and 1997, both incentive stock options and nonqualified stock options (without
the tax reimbursement feature) were granted. In 1999, the Company issued
restricted shares with vesting based on performance criteria. In 1997, the
Company issued restricted shares with a vesting period of one to five years.
Unless otherwise stipulated, the options are exercisable on a cumulative basis,
at a rate of 20% in each twelve month period, beginning six months after the
date of grant; however, the 1996 and 1994 options provide that no more than 50%
of the shares granted can be exercised in any one calendar year.
The Company has in effect the 1994 Stock Option Plan for non-employee directors
which allows the grant of options to purchase an aggregate of 100,000 shares of
Common Stock. A grant of an option to purchase 1,000 shares is issued on the
fifth business day after each annual meeting to each of the non-employee
directors. The option price is the last reported sale price on the New York
Stock Exchange composite tape on the date of grant. Options granted under the
Plan are nonqualified stock option grants with a term of seven years.
On November 7, 1999, the Company awarded 354,000 phantom stock units under an
incentive program to certain of its senior managers. Each unit awarded provides
that the holder will be given at either cancellation or vesting date the
difference between the market value of the Company's common stock on that date
and the base price which was the market value of the Company's common stock at
the date of the award ($4.75 per unit). Such compensation will be provided
either in the form of a lump sum payment, deferred compensation, new shares of
common stock of the Company, restricted common stock of the Company or any other
form of remuneration as determined by the Company in its sole discretion. Such
units vest at a rate of 20% in each twelve-month period, beginning six months
after the date of the awards. The Company may cancel any awards at its sole
discretion. The Company did not recognize any compensation expense during 1999
for these phantom stock units.
45
<PAGE>
The Company applies Accounting Principles Board Opinion Number 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related Interpretations in
accounting for these plans which requires compensation expense for the Company's
options to be recognized only if the market price of the underlying stock
exceeds the exercise price on the date of grant. Accordingly, the Company has
not recognized compensation expense for any of its options granted.
SFAS 123, "Accounting for Stock-Based Compensation," requires pro forma
disclosures for option grants when accounting for stock-based compensation plans
in accordance with APB 25. The pro forma effects are determined as if
compensation costs were recognized using a fair value based accounting method.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.00% for 1999, 5.00% for 1998 and 5.75%
for 1997; expected lives of eight years for 1992 Plan options and six years for
1994 Plan options; expected volatility of 41% for 1999, 38% for 1998 and 34% for
1997; and a zero percent dividend yield.
The pro forma effects on net loss and loss per share of options granted after
December 31, 1994 are as follows:
(in thousands, except per share data) 1999 1998 1997
------ ------ -----
Reported net loss $(19,072) $(6,651) $(9,365)
Pro forma net loss (19,644) (7,073) (9,692)
Reported loss per share -
basic and diluted $ ( .87) $( .37) $( .47)
Pro forma loss per share -
basic and diluted ( .89) ( .39) ( .48)
SFAS 123 requires pro forma disclosures only for options granted after December
31, 1994; therefore, the pro forma amounts for compensation expense may not be
representative of the pro forma earnings impact upon future years.
46
<PAGE>
A reconciliation of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------
NUMBER WEIGHTED- Number Weighted- Number Weighted-
OF AVERAGE of Average of Average
OPTIONS EXERCISE Options Exercise Options Exercise
(THOUSANDS) PRICE (thousands) Price (thousands) Price
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of
year 1,740 $ 9.54 1,422 $ 10.82 1,314 $ 11.41
Granted 469 4.79 347 4.54 241 8.48
Exercised (62) 5.24 -- -- (12) 5.25
Forfeited (256) 10.43 (29) 12.18 (121) 13.16
------ ------ ------
Outstanding -
end of year 1,891 $ 8.39 1,740 $ 9.54 1,422 $ 10.82
------ ------- ------ ------- ------ -------
Exercisable at
end of year 1,066 $ 10.70 944 $ 11.77 752 $ 12.47
------ ------- ------ ------- ------ -------
Weighted-average
fair value of
options granted
during year $ 2.71 $ 2.34 $ 4.41
------ ------ ------
</TABLE>
The following table summarizes information about stock options outstanding at
January 2, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ---------------------------
Wtd. Avg.
Range of Number Remaining Wtd. Avg. Number Wtd. Avg.
Exercise Outstanding Contract Exercise Exercisable Exercise
Prices (thousands) Life Price (thousands) Price
- -------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 4-9 1,325 8.39 $ 6.07 500 $ 7.19
9-13 281 4.78 11.95 281 11.95
13-16 285 3.10 15.63 285 15.63
----- -----
1,891 7.06 8.39 1,066 10.70
----- -----
</TABLE>
NOTE 15. LEASES
The Company has various leases accounted for as operating leases. Rent expense
was $3.6 million for both 1999 and 1998 and $4.0 million for 1997. Future
minimum rental payments required under lease agreements for the next five years
are $3.3 million for 2000, $2.8 million for 2001, $2.2 million for 2002, $2.0
million for 2003 and $1.1 million for 2004. Aggregate future minimum rental
payments total $12.5 million.
47
<PAGE>
NOTE 16. CONTINGENCIES
The Company and its subsidiaries are involved in legal proceedings and claims
arising in the ordinary course of business. Although there can be no assurance
as to the ultimate disposition of these matters, management believes that the
probable resolution of such contingencies will not have a material adverse
effect on the financial condition of the Company.
NOTE 17. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share ("EPS"):
(in thousands, except per share data) 1999 1998 1997
-------- -------- --------
Loss before cumulative
effect of accounting change $(18,034) $ (6,651) $ (9,365)
Preferred stock dividends (3,047) (2,913) (2,981)
-------- -------- --------
Loss before cumulative effect
of accounting change available
to common shareholders (21,081) (9,564) (12,346)
Cumulative effect of accounting
change (1,038) -- --
-------- -------- --------
Basic EPS - loss available to
common shareholders (22,119) (9,564) (12,346)
Effect of dilutive securities -- -- --
-------- -------- --------
Diluted EPS - loss available
to common shareholders
after assumed conversions $(22,119) $ (9,564) $(12,346)
-------- -------- --------
Determination of shares:
Basic EPS - weighted-average shares 25,462 25,929 26,140
Effect of dilutive securities -- -- --
-------- -------- --------
Diluted EPS - adjusted weighted-average
shares after assumed conversions 25,462 25,929 26,140
-------- -------- --------
Loss per share-basic and diluted:
Loss before cumulative effect
of accounting change $ ( 0.83) $ (0.37) $ (0.47)
Cumulative effect of accounting
change (0.04) -- --
-------- -------- --------
Loss per share-basic and diluted $ ( 0.87) $ ( 0.37) $ ( 0.47)
-------- -------- --------
Common stock options were outstanding during 1999, 1998 and 1997 but were not
included in the computation of diluted loss per share because to do so would
have been antidilutive.
NOTE 18. SEGMENT INFORMATION AND MAJOR CUSTOMERS
48
<PAGE>
The Company had four principal business segments which were based upon
organizational structure: 1) denim and khaki; 2) commission finishing; 3)
decorative fabrics; and 4) yarn-dyed products.
The denim and khaki segment includes denim and khaki fabrics in various styles,
finishes and weights and chamois shirtings. In 1999, the Company began the exit
of the chamois shirting product line. The commission finishing segment consists
of outside commission dyeing and printing for the home decorative markets and
khaki dyeing. The decorative fabrics segment includes the design and
distribution of decorative fabrics for the home furnishings industry. The
Company exited the yarn-dyed flannel shirtings product line in 1999. Other
includes synthetic fabrics which was sold in January 1997; real estate
operations, which was sold in May 1997; and miscellaneous ancillary operations.
The percentages of net sales to foreign customers were 25.5%, 25.4% and 25.1% in
1999, 1998, and 1997, respectively. The Company has one denim and khaki customer
that accounted for more than 10% of net sales. Sales to this customer, as a
percentage of net sales, were 31.4%, 32.2% and 36.6% in 1999, 1998 and 1997,
respectively. This customer had an outstanding accounts receivable balance with
the Company of approximately $24.0 million at January 2, 2000. The Company has
not incurred any losses related to this customer's accounts receivable.
Operating income (loss) for each segment is total revenue less operating
expenses applicable to the segment. Intersegment revenue relates to the
commission finishing segment. Equity in earnings of unconsolidated affiliate is
included in the denim and khaki segment. Restructuring and impairment of asset
expenses, unallocated expenses, interest, income tax benefits and cumulative
effect of accounting change are not included in segment operating income (loss).
Segment identifiable assets include investments in unconsolidated affiliates,
pension assets, and income taxes. Denim and khaki and yarn-dyed product segments
include investments in unconsolidated affiliates. Pension assets are included in
each segment. Assets in the "Other" segment include cash, income taxes,
administrative facilities, deferred charges and miscellaneous receivables.
Unallocated expenses include certain legal expenses, bank fees and fees and
discounts on the sale of accounts receivable. Geographic sales dollars are
determined generally based on the ultimate destination of the fabric.
49
<PAGE>
SEGMENT INFORMATION
Sales, income (loss) from operations, identifiable assets, depreciation and
amortization, capital expenditures and geographic sales information for the
Company's operating segments are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES
Denim and Khaki $ 448,480 $ 545,013 $ 533,792
Commission Finishing 94,707 107,095 94,811
Decorative Fabrics 72,944 56,347 42,544
Yarn-Dyed Products 17,149 33,733 46,375
Other 1,453 4,668 10,755
------------------------------------
634,733 746,856 728,277
Less Intersegment Sales 18,412 18,230 11,424
------------------------------------
$ 616,321 $ 728,626 $ 716,853
====================================
INCOME (LOSS) FROM OPERATIONS
Denim and Khaki $ 17,608 $ 52,176 $ 36,491
Commission Finishing (6,874) (15,129) (13,077)
Decorative Fabrics 1,591 (408) (9,682)
Yarn-Dyed Products (5,625) (14,498) (5,048)
Other (628) (1,650) (3,324)
Unallocated Expenses (4,915) (5,812) (5,876)
------------------------------------
1,157 14,679 (516)
Restructuring and Impairment of Assets (16,017) (17,124) (5,176)
------------------------------------
(14,860) (2,445) (5,692)
Less Equity in Earnings of Unconsolidated Affiliate 1,684 5,210 2,637
------------------------------------
(16,544) (7,655) (8,329)
OTHER EXPENSE - NET 13,914 12,113 11,674
------------------------------------
LOSS BEFORE INCOME TAX BENEFIT, EQUITY IN EARNINGS OF
UNCONSOLIDATED AFFILIATE AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ (30,458) $ (19,768) $ (20,003)
====================================
IDENTIFIABLE ASSETS
Denim and Khaki $ 295,007 $ 302,171 $ 283,392
Commission Finishing 95,213 99,433 102,563
Decorative Fabrics 49,741 42,164 39,567
Yarn-Dyed Products 16,533 29,902 52,609
Other 16,303 14,847 28,515
------------------------------------
$ 472,797 $ 488,517 $ 506,646
====================================
DEPRECIATION AND AMORTIZATION
Denim and Khaki $ 13,322 $ 13,740 $ 12,692
Commission Finishing 8,131 8,104 8,027
Decorative Fabrics 2,338 2,421 2,029
Yarn-Dyed Products 734 2,745 2,643
Other 2,387 3,354 3,324
------------------------------------
$ 26,912 $ 30,364 $ 28,715
====================================
CAPITAL EXPENDITURES
Denim and Khaki $ 5,158 $ 21,069 $ 20,745
Commission Finishing 4,502 4,735 7,127
Decorative Fabrics 1,507 3,915 5,509
Yarn-Dyed Products 932 2,126 1,145
Other 1,095 976 1,764
------------------------------------
$ 13,194 $ 32,821 $ 36,290
====================================
GEOGRAPHIC SALES INFORMATION
United States $ 458,949 $ 543,432 $ 537,053
Belgium 73,377 102,780 93,520
North and South America - excluding U.S. 49,843 52,265 40,084
Other 34,152 30,149 46,196
------------------------------------
$ 616,321 $ 728,626 $ 716,853
====================================
</TABLE>
50
<PAGE>
NOTE 19. FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage risks associated
with changes in cotton prices, interest rates and foreign exchange rates.
The Company enters into options and futures contracts for cotton to manage the
risk of cotton price fluctuations by hedging both committed and anticipated
transactions. Gains and losses on these hedges are deferred and matched to
inventory purchases and credited or charged to cost of sales as such inventory
is sold. Gains of $4.0 million, $2.9 million and $0.3 million were credited to
cost of sales in 1999, 1998 and 1997, respectively.
The Company enters into foreign exchange contracts to hedge transactions
denominated in foreign currencies related to export sales and machinery
purchases. The gains or losses from these contracts are deferred and included in
the basis of the transaction hedged. The fair value of these contracts is
estimated using the end of year exchange rates.
The carrying amounts of cash, accounts receivable, subordinated note receivable,
certain other financial assets, accounts payable, short-term borrowings and
borrowings under the Revolving Credit Agreement are reasonable estimates of
their fair value at January 2, 2000 and January 3, 1999.
The fair value of the Company's long-term debt, excluding borrowings under the
Revolving Credit Agreement, is estimated based on the quoted market prices for
the same or similar issues or on the current rates offered for debt of the same
remaining maturities.
The carrying amount and estimated fair value of certain financial instruments at
January 2, 2000 and January 3, 1999 are as follows:
(in thousands) 1999 1998
--------------------- ----------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------ ----- ------ -----
Foreign Exchange
Contracts $ - $ - $ 236 $ 258
Long-Term Debt
Senior Note 32,144 31,466 42,858 42,772
8-1/8% Debentures 97,685 55,000 97,241 97,890
NOTE 20. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company has various transactions in the normal course of business with its
unconsolidated affiliated companies. Purchases of denim and yarn from Parras
Cone were $71.2 million, $78.4 million and $71.5 million in 1999, 1998 and 1997,
respectively. There were also insignificant miscellaneous services rendered from
and to Parras Cone in the normal course of business. The Company also purchased
$3.2 million of finished goods from Ashima Ltd., an unconsolidated affiliate, in
1999.
NOTE 21. RESTRUCTURING, IMPAIRMENT OF ASSETS AND DIVESTITURE
In recent years, the Company has undertaken a number of restructuring activities
to focus on core businesses and improve its cost competitiveness. During the
fourth quarter of the 1998 fiscal year, the Company implemented a comprehensive
51
<PAGE>
reorganization program that included the reconfiguration and closing of
manufacturing facilities, downsizing and reorganization of sales and
administrative staffs to reduce overhead costs and the divestiture of operations
which management believes are inconsistent with the strategic objectives of the
Company. Specifically, the comprehensive program included:
o Closing of the Salisbury plant and exit of production of fabrics for the
yarn-dyed segment at Cone facilities completed in May 1999. The disposal of
substantially all yarn-dyed shirting inventories by year-end 1999.
o Downsizing and reorganization of the corporate administrative staff and the
combination of denim and sportswear sales and marketing which was
substantially completed in March 1999.
o Reconfiguration of denim manufacturing overhead structures also
substantially completed in March 1999.
o Exit from ring-spun yarn manufacturing at the Company's Cliffside and
Florence plants completed in May 1999.
o The restructuring of the Carlisle plant reducing the workforce by
approximately 25% completed in September 1999.
The cost of the comprehensive reorganization program was reflected in
restructuring and impairment of assets charges, before income taxes, of $16.0
million and $17.1 million in 1999 and 1998, respectively. The components of the
1999 restructuring charges included the establishment of a $11.9 million reserve
for severance benefit payments, consulting fees and pension curtailment losses.
Severance benefit payments consisted of terminal leave pay for salary employees,
stay bonuses and health insurance. In addition, the Company also recognized
non-cash charges for impairment of property and equipment of $4.1 million at the
Cliffside and Florence yarn manufacturing facilities and the Carlisle screen
printing facility. The 1999 restructuring initiatives resulted in the reduction
of approximately 1,900 employees. In each phase of the plan the actual number of
employees terminated was consistent with the amounts provided for in the
restructuring accrual. The components of the 1998 restructuring charges included
the establishment of a $1.3 million reserve for severance benefit payments and
write-downs of $15.8 million for impairment of fixed assets at the Salisbury
plant. Assets that have been sold, or are held for sale at January 2, 2000, and
are no longer in use, were written down to their estimated fair values less
costs to sell. Determination of fair market value was based upon in-house
engineering and purchasing appraisals, surveys with used equipment dealers,
current prices for new equipment and analysis of whether the equipment would be
used internally, sold or abandoned. Assets held for sale continue to be included
in the Property, Plant and Equipment caption on the balance sheet in the
carrying amount of $12.1 million. Other expenses related to the comprehensive
reorganization program, including losses on inventories of discontinued styles,
of approximately $3.6 million and $2.2 million in 1999 and 1998, respectively,
were charged to cost of goods sold as incurred.
The following is a summary of activity related to the severance benefits and
other costs related to the comprehensive reorganization program (in millions):
December 1998 restructuring charges $ 1.3
52
<PAGE>
March 1999 restructuring charges 9.6
September 1999 restructuring charges 2.3
Payments (11.4)
----
Balance at January 2, 2000 $ 1.8
----
The Company is actively marketing the affected property and equipment currently
available for sale and expects the sale or disposition of such assets to be
completed within 18 to 24 months. However, the actual timing of the disposition
of these assets may vary due to market conditions.
In 1997, the Company terminated approximately 130 employees at the Granite plant
and incurred restructuring charges of $4.5 million. In addition, the Company
recognized other restructuring charges for severance and other employee-related
costs of $0.7 million in 1997.
In May 1997, the Company sold substantially all the assets of its real estate
operations, including its subsidiary Cornwallis Development Co., for $19.5
million. The gain recognized upon disposition of the assets in 1997 was
insignificant.
NOTE 22. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted several American Institute of Certified Public Accountants
("AICPA") Statements of Position ("SOP") in fiscal year 1999. SOP 98-5,
"Reporting the Costs of Start-up Activities," requires future start-up costs to
be expensed as incurred and previously capitalized start-up costs to be expensed
when SOP 98-5 is adopted. The Company recognized a charge of $1.0 million, the
Company's 50% portion of Parras Cone's unamortized start-up costs, as a
cumulative effect of an accounting change. Had SOP 98-5 not been adopted during
1999, net loss would have been reduced by $0.5 million, or $.02 per share. SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," requires capitalization of certain costs which the Company has
historically expensed. The Company capitalized $1.1 million of costs related to
internally developed software in 1999. Had SOP 98-1 not been adopted during
1999, net loss would have been increased by $0.7 million, or $.03 per share.
In June 1998, the Financial Accounting Standards Board (FASB") issued Statements
of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters for all
fiscal years beginning after June 15, 1999. The effective date has been delayed
to all fiscal quarters for all fiscal years beginning after June 15, 2000, as a
result of the FASB's issuance in August 1999 of SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. l33." SFAS 133 provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities and requires all derivatives to be recorded on the balance sheet at
fair value. The Company has not yet determined what the effect of SFAS 133 will
be on the earnings and financial position of the Company.
53
<PAGE>
NOTE 23. QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------
APR. 4, JULY 4, OCT. 3, JAN. 2,
(in thousands, except per share data) 1999 1999 1999 2000
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 157,257 $ 174,492 $ 147,197 $ 137,375
Gross profit 15,343 14,243 10,676 7,862
Income (loss) from operations (10,879) 2,518 (4,416) (3,767)
Equity in earnings (losses) of unconsolidated affiliate 867 1,090 (405) 132
Income (loss) before cumulative effect of accounting change (8,432) 714 (5,398) (4,918)
Cumulative effect of accounting change (1,038) -- -- --
Net income (loss) (9,470) 714 (5,398) (4,918)
Total comprehensive income (loss) (9,472) 697 (5,339) (4,977)
Earnings (loss) before cumulative effect of accounting change
per share - basic and diluted $ (0.36) $ -- $ (0.24) $ (0.22)
Earnings (loss) per share - basic and diluted $ (0.40) $ -- $ (0.24) $ (0.22)
================================================
Weighted-average shares outstanding
Basic 25,431 25,442 25,486 25,490
================================================
Diluted 25,431 25,442 25,486 25,490
================================================
Common stock prices
High $ 5.56 $ 7.00 $ 6.81 $ 5.13
------------------------------------------------
Low $ 4.25 $ 4.94 $ 4.88 $ 4.19
------------------------------------------------
Quarters Ended
------------------------------------------------
Mar. 28, June 28, Sept. 27, Jan. 3,
(in thousands, except per share data) 1998 1998 1998 1999
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 190,171 $ 197,304 $ 187,359 $ 153,792
Gross profit 17,127 20,156 19,741 9,807
Income (loss) from operations 3,372 6,090 4,946 (22,063)
Equity in earnings of unconsolidated affiliate 1,252 1,264 1,285 1,409
Net income (loss) 1,544 3,051 2,792 (14,038)
Total comprehensive income (loss) 1,517 3,044 2,830 (14,036)
Earnings (loss) per share - basic and diluted $ 0.03 $ 0.09 $ 0.08 $ (0.58)
================================================
Weighted-average shares outstanding
Basic 26,183 26,166 25,972 25,432
================================================
Diluted 26,210 26,280 25,994 25,432
================================================
Common stock prices
High $ 9.00 $ 10.25 $ 9.19 $ 7.88
------------------------------------------------
Low $ 6.81 $ 8.25 $ 6.00 $ 3.81
------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The number of holders of record of the Company's Common Stock as of January 31,
2000 was 382.
No dividends have been declared on Common Stock since 1984 and the Company
anticipates that its earnings for the foreseeable future will be retained for
use in its business and to finance growth. Payment of cash dividends in the
future will depend upon the Company's financial condition, results of
operations, current and anticipated capital requirements, and other factors
deemed relevant by the Company's Board of Directors.
In the first quarter of 1999, the Company recognized restructuring and
impairment of asset charges of $12.9 million related to severance and other
costs of $9.6 million ($.24 per share, net of tax) and $3.3 million ($.08 per
share, net of tax) to write-down Cliffside and Florence property and equipment
to its estimated net realizable value. Additionally, a charge of $1.6 million
($.04 per share, net of tax) was recorded in the first quarter of 1999 to
reflect write-down of certain inventory values. In the third quarter of 1999,
the Company recognized restructuring and impairment of asset charges of $3.1
million related to severance and other costs of $2.3 million ($.06 per share,
net of tax) and $.8 million ($.02 per share, net of tax) to write-down Carlisle
equipment to its estimated net realizable value. Additionally, a charge of $2.0
million ($.05 per share, net of tax) was recorded in the third quarter of 1999
to reflect a write-down of certain inventory values. See Note 21,
"Restructuring, Impairment of Assets and Divestiture," of the Notes to the
Consolidated Financial Statements.
In the fourth quarter of 1998, the Company recognized restructuring and
impairment of asset charges of $17.1 million related to severance and other
costs of $1.3 million ($.03 per share, net of tax) and $15.8 million ($.37 per
share, net of tax) to write-down Salisbury property and equipment to its
estimated net realizable value. Additionally, a charge of $2.2 million ($.05 per
share, net of tax) was recorded in the fourth quarter of 1998 to reflect
write-down of certain inventory values. See Note 21, "Restructuring, Impairment
of Assets and Divestiture," of the Notes to the Consolidated Financial
Statements.
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to executive compensations presented under the heading
"Executive Compensation" in the Company's definitive Proxy Statement prepared
for the Annual Meeting of Shareholders to be held on May 9, 2000, and is hereby
incorporated by reference. Information regarding executive officers is included
as Item 4A in Part I.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is presented under the heading
"Executive Compensation" in the Company's definitive Proxy Statement prepared
for the Annual Meeting of Shareholders to be held on May 9, 2000, and is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to beneficial ownership of the Company's voting
securities by each director and all officers and directors as a group, and by
any person known to beneficially own more than 5% of any class of voting
security of the Company, is presented under the heading "Security Ownership of
Directors, Nominees and Named Executive Officers" and "Security Ownership of
Certain Beneficial Owners" in the Company's definitive Proxy Statement prepared
for the Annual Meeting of Shareholders to be held on May 9, 2000, and is hereby
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
presented under the headings "Compensation of Directors" in the Company's
definitive Proxy Statement prepared for the Annual Meeting of Shareholders to be
held on May 9, 2000, and is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) The following financial statements of the Registrant are
incorporated by reference in Item 8 hereof:
Independent Auditor's Report
Consolidated Statements of Operations for the Years
Ended January 2, 2000, January 3, 1999, and December 28,
1997
55
<PAGE>
Consolidated Balance Sheets as of January 2, 2000 and
January 3, 1999
Consolidated Statements of Stockholders' Equity for the
Years Ended January 2, 2000, January 3, 1999 and
December 28, 1997
Consolidated Statements of Cash Flows for the Years
Ended January 2, 2000, January 3, 1999 and December 28,
1997
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statement Schedules are presented on
pages 58 through 59 hereto.
Report of Independent Auditor's relating to Schedule II
Schedule II - Valuation and Qualifying Accounts
All other schedules specified under Regulation S-X are
omitted because they are not applicable, not required or
the information required appears in the Consolidated
Financial Statements or Notes thereto.
(a)(3) Exhibits. Exhibits to this report are listed on the
accompanying Index to Exhibits.
(b) Reports on Form 8-K
No report on 8-K was filed during the fourth quarter of
1999.
56
<PAGE>
MCGLADREY & PULLEN, LLP
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Cone Mills Corporation
Greensboro, North Carolina
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ McGLADREY & PULLEN, LLP
MCGLADREY & PULLEN, LLP
Greensboro, North Carolina
February 11, 2000
57
<PAGE>
CONE MILLS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended January 2, 2000, January 3, 1999 and December 28, 1997
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------------------------- --------- ------------------------------ ----------- ---------
Additions
------------------------------
Balance (1) (2)
at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
- ----------------------------------------------------- --------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
January 2, 2000
Valuation accounts deducted
from the assets to which they apply:
Provision for doubtful accounts $ 1,500 $ 1,938 $ 3,550(a) $1,938 (c) $ 5,050
------- ------- ------- ------- -------
Reserve for inventory (b) 6,568 830 -- 123 7,275
------- ------- ------- ------- -------
Reserve for fixed asset writedowns (b) 16,738 4,124 -- 5,172 15,690
------- ------- ------- ------- -------
Reserve for restructuring charges (b) 1,058 11,892 -- 11,111 1,839
------- ------- ------- ------- -------
Reserve for future losses (b) 122 -- -- 98 24
------- ------- ------- ------- -------
January 3, 1999
Valuation accounts deducted
from the assets to which they apply:
Provision for doubtful accounts $ 1,500 $ 1,433 $ -- $ 1,433 (c) $ 1,500
------- ------- ------- ------- -------
Reserve for inventory (b) 5,075 2,935 -- 1,442 6,568
------- ------- ------- ------- -------
Reserve for fixed asset writedowns (b) 1,638 15,800 -- 700 16,738
------- ------- ------- ------- -------
Reserve for restructuring charges (b) -- 1,058 -- -- 1,058
------- ------- ------- ------- -------
Reserve for future losses (b) 1,357 88 -- 1,323 122
------- ------- ------- ------- -------
December 28, 1997
Valuation accounts deducted
from the assets to which they apply:
Provision for doubtful accounts $ 3,000 $ 624 $ -- $ 2,124(c)(d) $ 1,500
------- ------- ------- ------- -------
Reserve for inventory (b) -- 5,075 -- -- 5,075
------- ------- ------- ------- -------
Reserve for fixed asset writedowns 2,638 -- -- 1,000 1,638
------- ------- ------- ------- -------
Reserve for loss on real estate disposal 4,500 -- -- 4,500 --
------- ------- ------- ------- -------
Reserve for future losses (b) 1,725 950 -- 1,318 1,357
------- ------- ------- ------- -------
</TABLE>
(a) Represents doubtful accounts allowance carried over from Cone Receivables,
LLC.
(b) Represents reserves charged to costs and expenses.
(c) Represents bad debts charged off.
(d) Includes reduction of $1,750 related to sale of receivables to Cone
Receivables, LLC.
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
<S> <C> <C>
*2.1(a) Receivables Purchase and Servicing
Agreement dated as of September 1, 1999,
by and among Cone Receivables II LLC,
as Seller, Redwood Receivables
Corporation, as Purchaser, the Registrant,
as Servicer, and General Electric Capital
Corporation, as Operating Agent and
Collateral Agent, filed as Exhibit 2.1(h)
to Registrant's report on Form 10-Q
for the quarter ended October 3, 1999.
*2.1(b) Receivables Transfer Agreement dated as of September 1,
1999, by and among the Registrant, any other Originator
Party hereto, and Cone Receivables II LLC, filed as
Exhibit 2.1(i) to Registrant's report on Form 10-Q for the
quarter ended October 3, 1999.
2.1(c) First Amendment and Waiver to Securitization
Agreements dated as of November 16, 1999, by
and between Cone Receivables II LLC, Cone Mills
Corporation, Redwood Receivables Corporation
and General Electric Capital Corporation,
together with all exhibits thereto. 74
2.1(d) Second Amendment to Securitization Agreements
dated as of January 28, 2000, by and between
Cone Receivables II LLC, Cone Mills
Corporation, Redwood Receivables Corporation,
and General Electric Capital Corporation,
together with all exhibits thereto. 79
*2.2(a) Investment Agreement dated as of
June 18, 1993, among Compania Industrial
de Parras, S.A. de C.V., Sr. Rodolfo
Garcia Muriel, and Cone Mills
Corporation, filed as Exhibit 2.2(a)
to Registrant's report on Form 10-Q for
the quarter ended July 4, 1993, with
exhibits herein numbered 2.2(c),
(d), (f), (g), and (j) attached.
2.2(b) Commercial Agreement dated as of July
1, 1999, among Compania Industrial de
Parras, S.A. de C.V., Cone Mills
Corporation and Parras Cone de Mexico,
S.A. 86
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
*2.2(c) Guaranty Agreement dated as of June 25,
1993, between Cone Mills Corporation
and Compania Industrial de Parras, S.A.
de C.V., filed as Exhibit 2.2(c) to
Registrant's report on Form 10-Q for
the quarter ended July 4, 1993.
*2.2(d) Joint Venture Agreement dated as of
June 25, 1993, between Compania
Industrial de Parras, S.A. de C.V.,
and Cone Mills (Mexico), S.A. de C.V.,
filed as Exhibit 2.2(d) to
Registrant's report on Form 10-Q for
the quarter ended July 4, 1993.
*2.2(e) First Amendment to Joint Venture
Agreement dated as of June 14, 1995,
between Compania Industrial de Parras,
S.A. de C.V., and Cone Mills (Mexico),
S.A. de C.V., filed as Exhibit 2.2(e)
to the Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
*2.2(f) Joint Venture Registration Rights
Agreement dated as of June 25, 1993,
among Parras Cone de Mexico, S.A.,
Compania Industrial de Parras, S.A. de
C.V. and Cone Mills (Mexico),
S.A. de C.V., filed as Exhibit 2.2(e)
to Registrant's report on Form 10-Q
for the quarter ended July 4, 1993.
*2.2(g) Parras Registration Rights Agreement
dated as of June 25, 1993, between Compania
Industrial de Parras, S.A. de C.V. and
Cone Mills Corporation, filed as Exhibit
2.2(f) to the Registrant's report on Form
10-Q for the quarter ended July 4, 1993.
*2.2(h) Support Agreement dated as of June 25,
1993, among Cone Mills Corporation, Sr.
Rodolfo L. Garcia, Sr. Rodolfo Garcia
Muriel and certain other person listed
herein ("private stockholders"), filed
as Exhibit 2.2(g) to Registrant's
report on Form 10-Q for the quarter
ended July 4, 1993.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
*4.1 Restated Articles of Incorporation of the Registrant
effective August 25, 1993, filed as Exhibit 4.1 to
Registrant's report on Form 10-Q for the quarter ended
October 3, 1993.
*4.1(a) Articles of Amendment of the Articles of
Incorporation of the Registrant effective
October 22, 1999, to fix the designation,
preferences, limitations, and relative
rights of a series of its Class B Preferred
Stock, filed as Exhibit 4.1(a) to Registrant's
Report on Form 10-Q for the quarter ended
October 3, 1999.
*4.1(b) Rights Agreement dated as of October 14,
1999, between the Registrant and First
Union National Bank, as Rights Agent,
with Form of Articles of Amendment with
respect to the Class B Preferred Stock
(Series A), the Form of Rights Certificate,
and Summary of Rights attached, filed as
Exhibit 1 to the Registrant's report on Form
8-A dated October 29, 1999.
*4.2 Amended and Restated Bylaws of Registrant,
effective June 18, 1992, filed as Exhibit
3.5 to the Registrant's Registration
Statement on Form S-1 (File No. 33-46907).
*4.3 Note Agreement dated as of August 13, 1992, between Cone
Mills Corporation and The Prudential Insurance Company of
America, with form of 8% promissory note attached, filed
as Exhibit 4.01 to the Registrant's report on Form 8-K
dated August 13, 1992.
*4.3(a) Letter Agreement dated September 11, 1992, amending the
Note Agreement dated August 13, 1992, between the
Registrant and The Prudential Insurance Company of
America, filed as Exhibit 4.2 to the Registrant's report
on Form 8-K dated March 1, 1995.
*4.3(b) Letter Agreement dated July 19, 1993,
amending the Note Agreement dated
August 13, 1992, between the Registrant
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
and The Prudential Insurance Company of America, filed as
Exhibit 4.3 to the Registrant's report on Form 8-K dated
March 1, 1995.
*4.3(c) Letter Agreement dated June 30, 1994,
amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company of
America, filed as Exhibit 4.4 to the
Registrant's report on Form 8-K dated
March 1, 1995.
*4.3(d) Letter Agreement dated November 14, 1994,
amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company of
America, filed as Exhibit 4.5 to the
Registrant's report on Form 8-K dated
March 1, 1995.
*4.3(e) Letter Agreement dated as of June 30,
1995, amending the Note Agreement dated
August 13, 1992, between the Registrant
and The Prudential Insurance Company
of America, filed as Exhibit 4.3(e) to
the Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
*4.3(f) Letter Agreement dated as of June 30,
1995, between the Registrant and
The Prudential Insurance Company
of America superseding Letter Agreement,
filed as Exhibit 4.3(e) to the
Registrant's report on Form 10-Q
for the quarter ended July 2, 1995.
*4.3(g) Letter Agreement dated as of March 30, 1996, between the
Registrant and The Prudential Insurance Company of
America, filed as Exhibit 4.3(g) to the Registrant's
report on Form 10-Q for the quarter ended March 31, 1996.
*4.3(h) Letter Agreement dated as of January
31, 1997, between the Registrant and
The Prudential Insurance Company of
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
America, filed as Exhibit 4.3(h) to the Registrant's
report on Form 10-K for the year ended December 29, 1996.
*4.3(i) Letter Agreement dated as of July 31, 1997, between the
Registrant and The Prudential Insurance Company of
America, filed as Exhibit 4.3(i) to the Registrant's
report on Form 10-Q for the quarter ended September 28,
1997.
*4.3(j) Modification to Note Agreement dated
as of February 14, 1998, between the
Registrant and The Prudential
Insurance Company of America, filed as
Exhibit 4.3(j) to Registrant's report on
Form 10-Q for the quarter ended March 29,
1998.
*4.3(k) Letter Agreement dated as of
September 1, 1999, amending the Note
Agreement dated August 13, 1992,
between the Registrant and The Prudential
Insurance Company of America, filed as
Exhibit 4.3(i) on Form 10-Q for the
quarter ended October 3, 1999.
*4.3(l) Amendment of 1992 Note Agreement dated as
of January 28, 2000, by and among Cone Mills
Corporation and The Prudential Insurance
Company of America, together with all
exhibits thereto, filed as Exhibit 9 to the
Registrant's report on Form 8-K dated
February 11, 2000.
*4.4 Credit Agreement dated as of January 28, 2000,
by and among Cone Mills Corporation, as
Borrower, Bank of America, N.A., as Agent
and as Lender and the Lenders party thereto
from time to time, together with all exhibits
thereto, filed as Exhibit 1 to the
Registrant's report on Form 8-K dated
February 11, 2000.
*4.4(a) Guaranty Agreement dated as of January 28,
2000, made by Cone Global Finance Corporation,
CIPCO S.C., Inc. and Cone Foreign Trading
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
LLC in favor of Bank of America, N.A. as Revolving Credit
Agent for the Lenders, The Prudential Insurance Company of
America, SunTrust Bank, Morgan Guaranty Trust Company of
New York, Wilmington Trust Company, as General Collateral
Agent, Bank of America, N.A., as Priority Collateral
Agent, and Atlantic Financial Group, Ltd., together with
all exhibits thereto, filed as Exhibit 2 to the
Registrant's report on Form 8-K dated February 11, 2000.
*4.4(b) Priority Security Agreement dated as of
January 28, 2000, by Cone Mills Corporation
and certain of its subsidiaries, as Grantors,
and Bank of America, N.A., as Priority
Collateral Agent, together with all exhibits
thereto, filed as Exhibit 3 to the Registrant's
report on Form 8-K dated February 11, 2000.
*4.4(c) General Security Agreement dated as of January
28,2000, by Cone Mills Corporation and certain
of its subsidiaries, as Grantors, and
Wilmington Trust Company, as General Collateral
Agent, together with all exhibits thereto,
filed as Exhibit 4 to the Registrant's
report on Form 8-K dated February 11, 2000.
*4.4(d) Securities Pledge Agreement dated as of January 28, 2000,
by Cone Mills Corporation in favor of Wilmington Trust
Company, as General Collateral Agent, together with all
exhibits thereto, filed as Exhibit 5 to the Registrant's
report on Form 8-K dated February 11, 2000.
*4.4(e) CMM Pledge Agreement dated as of January 28, 2000, by Cone
Mills Corporation in favor of Wilmington Trust Company, as
General Collateral Agent, together with all exhibits
thereto, filed as Exhibit 6 to the Registrant's Report on
Form 8-K dated February 11, 2000.
*4.4(f) Deed of Trust, Security Agreement, Fixture
Filing, Assignment of Leases and Rents and
Financing Statement dated as of January 28,
2000, between Cone Mills Corporation, as Grantor,
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
TIM, Inc., as Trustee, Wilmington Trust
Company, as General Collateral Agent, and
Bank of America, N.A., as Designated
Collateral Subagent, together with all
exhibits thereto, filed as Exhibit 7 to the Registrant's
report on Form 8-K dated February 11, 2000.
*4.4(g) Deed of Trust, Security Agreement, Fixture
Filing, Assignment of Leases and Rents and
Financing Statement dated as of January 28,
2000, between Cone Mills Corporation, as
Grantor, TIM, Inc., as Trustee, and Bank of
America, N.A., as Priority Collateral Agent,
together with all exhibits thereto, filed as
Exhibit 8 to the Registrant's report on Form
8-K dated February 11.
4.4(h) Termination Agreement dated as of January
28, 2000, between the Registrant and Morgan
Guaranty Trust Company of New York, as
Agent for various banks terminating the
Credit Agent dated August 7, 1997. 89
*4.5 Specimen Class A Preferred Stock
Certificate, filed as Exhibit 4.5
to the Registrant's Registration
Statement on Form S-1(File No. 33-46907).
*4.6 Specimen Common Stock Certificate,
effective June 18, 1992, filed as
Exhibit 4.7 to the Registrant's
Registration Statement on Form S-1
(File No. 33-46907).
*4.7 Cone Mills Corporation 1983 ESOP as amended and restated
effective December 1, 1994, filed as Exhibit 4.9 to the
Registrant's report on Form 10-K for year ended January 1,
1995.
*4.7(a) First Amendment to the Cone Mills Corporation 1983 ESOP
dated May 9, 1995, filed as Exhibit 4.9(a) to the
Registrant's report on Form 10-K for year ended December
31, 1995.
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
*4.7(b) Second Amendment to the Cone Mills Corporation 1983 ESOP
dated December 5, 1995, filed as Exhibit 4.9(b) to the
Registrant's report on Form 10-K for year ended December
31,1995.
*4.7(c) Third Amendment to the Cone Mills Corporation 1983 ESOP
dated August 7, 1997, filed as Exhibit 4.8(c) to the
Registrant's report on Form 10-Q for the quarter ended
September 28,1997.
*4.7(d) Fourth Amendment to the Cone Mills Corporation 1983 ESOP
dated December 4, 1997, filed as Exhibit 4.8(d) to the
Registrant's report on Form 10-K for the year ended
December 28,1997.
*4.8 Indenture dated as of February 14,
1995, between Cone Mills Corporation
and Wachovia Bank of North Carolina,
N.A. as Trustee (Bank of New York is
successor Trustee), filed as Exhibit 4.1
to Registrant's Registration Statement
on Form S-3 (File No. 33-57713).
Management contract or compensatory plan or arrangement
(Exhibits 10.1 - 10.13)
*10.1 Employees' Retirement Plan of Cone Mills Corporation as
amended and restated effective December 1, 1994, filed as
Exhibit 10.1 to the Registrant's report on Form 10-K for
the year ended January 1, 1995.
*10.1(a) First Amendment to the Employees' Retirement Plan of Cone
Mills Corporation dated May 9,1995, filed as Exhibit
10.1(a) to the Registrant's report on Form 10-K for the
year ended December 31, 1995.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
*10.1(b) Second Amendment to the Employees' Retirement Plan of Cone
Mills Corporation dated December 5, 1995, filed as Exhibit
10.1(b) to the Registrant's report on Form 10-K for the
year ended December 31, 1995.
*10.1(c) Third Amendment to the Employees'
Retirement Plan of Cone Mills
Corporation dated August 16, 1996,
filed as Exhibit 10.1(c) to the
Registrant's report on Form 10-K
for the year ended December 29, 1996
*10.1(d) Fourth Amendment to the Employees' Retirement Plan of Cone
Mills Corporation, filed as Exhibit 10 to the Registrant's
report on Form 10-Q for the quarter ended September 28,
1997.
*10.1(e) Fifth Amendment to Employees' Retirement Plan of Cone
Mills Corporation dated December 4, 1997, filed as Exhibit
10.1(e) to the Registrant's report on Form 10-K or the
year ended December 28, 1997.
*10.2 Cone Mills Corporation SERP as amended and restated as of
December 5, 1995, filed as Exhibit 10.2 to the
Registrant's report on Form 10-K for the year ended
December 31, 1995.
*10.3 Excess Benefit Plan of Cone Mills Corporation as amended
and restated as of December 5, 1995, filed as Exhibit 10.3
to the Registrant's report on Form 10-K for the year ended
December 31, 1995.
*10.4 1984 Stock Option Plan of Registrant
filed as Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1
(File No. 33-28040).
*10.5 Form of Nonqualified Stock Option
Agreement under 1984 Stock Option Plan
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
of Registrant, filed as Exhibit 10.8 to
the Registrant's Registration Statement
on Form S-1 (File No. 33-28040).
*10.6 Form of Incentive Stock Option Agreement
under 1984 Stock Option Plan of
Registrant, filed as Exhibit 10.9 to the
Registrant's Registration Statement on
Form S-1 (File No. 33-28040).
*10.7 1992 Stock Option Plan of Registrant, filed as Exhibit
10.9 to the Registrant's Report on Form 10-K for the year
ended December 29, 1991.
*10.7(a) Amended and Restated 1992 Stock Plan, filed as Exhibit
10.1 to Registrant's report on Form 10-Q for the quarter
ended March 31, 1996.
*10.8 Form of Incentive Stock Option Agreement under 1992 Stock
Option Plan, filed as Exhibit 10.10 to the Registrant's
report on Form 10-K for the year ended January 3, 1993.
*10.8(a) Form of Nonqualified Stock Option Agreement under 1992
Stock Option Plan, filed as Exhibit 10.8(a) to the
Registrant's report on Form 10-K for the year ended
December 29,1996.
*10.8(b) Form of Nonqualified Stock Option Agreement under 1992
Amended and Restated Stock Plan, filed as Exhibit 10.8(b)
to the Registrant's report on Form 10-K for the year ended
December 29, 1996.
*10.8(c) Form of Restricted Stock Award
Agreement under 1992 Amended and
Restated Stock Plan, filed as Exhibit 10.8(c) to the
Registrant's report on Form 10-K for the year ended
December 28, 1997.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
*10.9 1994 Stock Option Plan for Non- Employee Directors of
Registrant, filed as Exhibit 10.9 to Registrant's report
on Form 10-K for the year ended January 2,1994.
*10.10 Form of Non-Qualified Stock Option Agreement under 1994
Stock Option Plan for Non-Employee Directors of
Registrant, filed as Exhibit 10.10 to Registrant's report
on Form 10-K for the year ended January 2, 1994.
*10.11 Management Incentive Plan of the Registrant, filed as
Exhibit 10.11(b) to Registrant's report on Form 10-K for
the year ended January 3, 1993.
*10.12 1997 Senior Management Incentive Compensation Plan, filed
as Exhibit 10.2 to Registrant's report on Form 10-Q for
the quarter ended March 31, 1996.
*10.13 1997 Senior Management Discretionary Bonus Plan, filed as
Exhibit 10.13 to the Registrant's report on Form 10-K for
the year ended December 29, 1996.
*10.14 Form of Agreement between the Registrant
and Levi Strauss dated as of March 30,
1992, filed as Exhibit 10.14 to the
Registrant's Registration Statement on
Form S-1 (File No. 33-46907).
*10.15 First Amendment to Supply Agreement dated as of April 15,
1992, between the Registrant and Levi Strauss dated as of
March 30, 1992, filed as Exhibit 10.15 to Registrant's
Registration Statement on Form S-1 (No. 33-469007).
*10.16 Agreement dated January 1, 1999, between the Registrant
and Parkdale Mills, Inc., filed as Exhibit 10.17 to
Registrant's Report on Form 10-K for the year ending
January 2, 2000.
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ---------
<S> <C> <C>
*10.17 Tenth Amendment to Master Lease dated as of January 28,
2000, between Atlantic Financial Group, Ltd. and Cone
Mills Corporation, together with all exhibits thereto,
filed as Exhibit 10 to Registrant's Report on Form 8-K
dated February 11, 2000.
21 Subsidiaries of the Registrant. 91
23.1 Consent of McGladrey & Pullen, LLP,
Independent auditor, with respect to
The incorporation by reference in the
Registrant's Registration Statements
On Form S-8 (Nos. 33-31977; 33-31979;
33-51951; 33-51953; 33-53705 and
33-67800 of their reports on the
consolidated financial statements
and schedules included in this Annual
Report on Form 10-K. 92
27 Financial Data Schedule 93
</TABLE>
- --------------------------------------------------------------------------------
*Incorporated by reference to the statement or report indicated.
The Registrant will provide any Shareholder or participant in the Employee
Equity Plan copies of any of the foregoing exhibits upon written request
addressed to Corporate Secretary, Cone Mills Corporation, 3101 North Elm Street,
Greensboro NC 27408.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONE MILLS CORPORATION
Date: March 31, 2000 By: /s/ John L. Bakane
---------------- ------------------
John L. Bakane
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dewey L. Trogdon Chairman of the Board March 31, 2000
- ---------------------
(Dewey L. Trogdon)
/s/ John L. Bakane Director, President March 31, 2000
- --------------------- and Chief Executive
(John L. Bakane) Officer (Principal
Executive Officer)
/s/ Gary L. Smith Executive Vice President March 31, 2000
- --------------------- and Chief Financial Officer
(Gary L. Smith)
/s/ Christopher F. Conlon Controller (Principal March 31, 2000
- --------------------- Accounting Officer)
(Christopher F. Conlon)
/s/ Doris R. Bray Director March 31, 2000
- ---------------------
(Doris R. Bray)
/s/ Jeanette C. Kimmel Director March 31, 2000
- ----------------------
(Jeanette C. Kimmel)
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles M. Reid Director March 31, 2000
- ----------------------
(Charles M. Reid)
/s/ John W. Rosenblum Director March 31, 2000
- ---------------------
(John W. Rosenblum)
/s/ Cyrus C. Wilson Director March 31, 2000
- --------------------
(Cyrus C. Wilson)
/s/ David T. Kollat Director March 31, 2000
- -------------------
(David T. Kollat)
/s/ Haynes G. Griffin Director March 31, 2000
- ---------------------
(Haynes G. Griffin)
/s/ Marc H. Kozberg Director March 31, 2000
- -------------------
(Marc H. Kozberg)
/s/ Bruce H. Hendry Director March 31, 2000
- -------------------
(Bruce H. Hendry)
</TABLE>
72
EXHIBIT 2.1(C)
FIRST AMENDMENT AND WAIVER TO SECURITIZATION AGREEMENTS
THIS FIRST AMENDMENT AND WAIVER TO SECURITIZATION AGREEMENTS (this
"AMENDMENT"), made and entered into as of November 16, 1999 (the "EFFECTIVE
DATE"), by and between CONE RECEIVABLES II LLC, a North Carolina limited
liability company ("CRLLC"), CONE MILLS CORPORATION, a North Carolina
corporation ("CONE MILLS"; each of CRLLC and Cone Mills a "Company" and,
collectively, the "COMPANIES"), REDWOOD RECEIVABLES CORPORATION, a Delaware
corporation ("REDWOOD"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York
corporation ("GECC"), in its capacities as Operating Agent and Collateral Agent.
W I T N E S E T H:
WHEREAS, Cone Mills, any other Originators that are or may hereafter become a
party thereto and CRLLC are parties to a certain Receivables Transfer Agreement,
dated as of September 1, 1999 (as amended to the date hereof, the "TRANSFER
AGREEMENT"; capitalized terms used herein and not otherwise defined herein shall
have the meanings given such terms in Annex X to the Transfer Agreement as
amended by this Amendment), whereby Cone Mills has agreed (and each Subsidiary
of Cone Mills which thereafter becomes an Originator will agree) to sell,
contribute or otherwise transfer to CRLLC, and CRLLC has agreed to purchase or
otherwise acquire from such Originators, all of the right, title and interest of
such Originators in the Receivables; and
WHEREAS, CRLLC, as Seller, Redwood, as Purchaser, Cone Mills, as Servicer, and
GECC, as Operating Agent and as Collateral Agent, are parties to a certain
Receivables Purchasing and Servicing Agreement, dated as of September 1, 1999
(as amended to the date hereof, the "PURCHASE AGREEMENT"; the Transfer Agreement
and the Purchase Agreement, collectively, the "SECURITIZATION AGREEMENTS"),
whereby Purchaser has agreed, among other things, to purchase from CRLLC from
time to time the Receivables sold or contributed to CRLLC pursuant to the
Transfer Agreement; and
WHEREAS, Cone Mills has requested that the Securitization Agreements be
amended in certain respects and that certain waivers be granted with respect to
the Securitization Agreements as set forth in this Amendment, and Redwood and
GECC are willing to agree to such amendments and grant such waivers subject to
the terms and conditions of this Amendment.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. AMENDMENTS OF SECURITIZATION AGREEMENTS. Subject to the terms and
conditions of this Amendment, the Securitization Agreements shall be amended as
follows:
(A) The Transfer Agreement shall be amended by deleting Schedule
4.01(m) attached thereto and by substituting in lieu thereof the revised
Schedule 4.01(m) attached to this Amendment.
(B) The Transfer Agreement shall be further amended by deleting
Schedule 4.03(k) attached thereto and by substituting in lieu thereof the
revised
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Schedule 4.03(k) attached to this Amendment.
(C) Annex X to each Securitization Agreement is hereby further amended
by deleting the reference to the date "February 24, 1995" in the definition
therein of the term "INDENTURE" and by substituting a reference to the date
"February 14, 1995" in lieu thereof.
2. CERTAIN WAIVERS. Subject to the terms and conditions of this Amendment,
Redwood and GECC (in its capacities as Operating Agent and Collateral Agent)
each hereby waives any Termination Event or Incipient Termination Event under
Section 9.01(h) of the Purchase Agreement and any Event of Servicer Termination
or Incipient Servicer Termination Event under Section 9.02(b) of the Purchase
Agreement that may have occurred as a result of the following events:
(a) Cone Mills' incurrence of Debt under the synthetic lease
transaction with SunTrust Banks, Inc. described on
Schedule 4.03(k) to the Transfer Agreement as amended by
this Amendment; and
(b) The occurrence of an event described in Section
4043(c)(3) of ERISA with respect to Cone Mills' Title IV
Plans as a result of employee terminations occurring
since January 1, 1999.
3. NO OTHER AMENDMENTS OR WAIVERS. Except for the amendments and
waivers expressly set forth and referred to in Section 1 and Section 2 above,
the Securitization Agreements shall remain unchanged and in full force and
effect. The waivers set forth in Section 2 above relate solely to specific
events described in such section, and nothing in this Amendment is intended (or
shall be construed) as a waiver of any other Termination Events, Incipient
Termination Events, Events of Servicer Termination or Incipient Servicer
Termination Events.
4. REPRESENTATIONS AND WARRANTIES. Each Company hereby represents and
warrants to Redwood, the Operating Agent and the Collateral Agent that (a) this
Amendment has been duly authorized, executed and delivered by each Company, (b)
after giving effect to this Amendment, no Termination Event, Incipient
Termination Event, Event of Servicer Termination or Incipient Servicer
Termination Event has occurred and is continuing as of this date, and (c) after
giving effect to this Amendment, all of the representations and warranties made
by each Company in the Securitization Agreements are true and correct in all
material respects on and as of the date of this Amendment (except to the extent
that any such representations or warranties expressly referred to a specific
prior date). Any breach in any material respect by Company of any of its
representations and warranties contained in this Section 4 shall be a
Termination Event and an Event of Servicer Termination for all purposes of the
Securitization Agreements.
5. RATIFICATION. Each Company hereby ratifies and reaffirms each and
every term, covenant and condition set forth in the Securitization Agreements
and all other documents delivered by such Company in connection therewith
(including without limitation the other Related Documents to which each Company
is a party), effective as of the date hereof.
6. ESTOPPEL. To induce Redwood, the Collateral Agent and the Operating
Agent to enter into this Amendment, each Company hereby acknowledges and agrees
that, as of the date hereof, there exists no right of offset, defense or
counterclaim in favor of either Company as against either Redwood, the
Collateral Agent or the Operating Agent with respect to the obligations of each
Company to either Redwood, the Collateral
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Agent or the Operating Agent under the Securitization Agreements or the other
Related Documents, either with or without giving effect to this Amendment.
7. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective, upon
the Effective Date, subject to the receipt by the Operating Agent of this
Amendment, duly executed, completed and delivered by each of the Companies,
Redwood, the Collateral Agent and the Operating Agent.
8. REIMBURSEMENT OF EXPENSES. Each Company hereby agrees that it shall
reimburse Redwood, the Collateral Agent and the Operating Agent on demand for
all reasonable costs and expenses (including without limitation reasonable
attorney's fees) incurred by such parties in connection with the negotiation,
documentation and consummation of this Amendment and the other documents
executed in connection herewith and therewith and the transactions contemplated
hereby and thereby.
9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK FOR CONTRACTS TO BE PERFORMED
ENTIRELY WITHIN SAID STATE.
10. SEVERABILITY OF PROVISIONS. Any provision of this Amendment which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. To the extent permitted by Applicable Law, each Company hereby
waives any provision of law that renders any provision hereof prohibited or
unenforceable in any respect.
11. COUNTERPARTS. This Amendment may be executed in any number of
several counterparts, all of which shall be deemed to constitute but one
original and shall be binding upon all parties, their successors and permitted
assigns.
12. ENTIRE AGREEMENT. The Securitization Agreements as amended by this
Amendment embody the entire agreement between the parties hereto relating to the
subject matter hereof and supersedes all prior agreements, representations and
under-standings, if any, relating to the subject matter hereof.
13. CONE MILLS' AND GECC'S CAPACITIES. Cone Mills is executing and
delivering this Amendment both in its capacity as an Originator under the
Transfer Agreement and as the Servicer under the Purchase Agreement and all
references herein to "Cone Mills" shall be deemed to include it in both such
capacities unless otherwise expressly indicated. GECC is executing and
delivering this Amendment both in its capacity as the Operating Agent for
Redwood and as the Collateral Agent for Redwood and the Purchaser Secured
Parties, and all references herein to "GECC" shall be deemed to include it in
both such capacities unless otherwise expressly indicated.
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IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CONE RECEIVABLES II LLC
By: /s/ Samir M. Gabriel
------------------------------
Name: Samir M. Gabriel
Title: President
c/o AMACAR Group, L.L.C.
6525 Morrison Boulevard
Suite 318
Charlotte, North Carolina 28210
Attention: Treasurer
Telecopy: (706) 365-1362
with a copy to: 3101 North Elm Street,
Third Floor
Greensboro, North Carolina 27415-6540
Attention: Treasurer
Telecopy: (336) 379-6043
REDWOOD RECEIVABLES CORPORATION
By: /s/ Denis Creeden
------------------------------
Name: Denis Creeden
Title: Assistant Secretary
3001 Summer Street
Stamford, Connecticut 06927
Attention: Redwood Administrator
Telecopy: (203) 961-2953
CONE MILLS CORPORATION, AS AN
ORIGINATOR AND AS SERVICER
By /s/ Neil W. Koonce
------------------------------
Name: Neil W. Koonce
Title: Vice President
3101 North Elm Street
Greensboro, North Carolina 27415-6540
Attention: Treasurer
Telecopy: (336) 379-6043
GENERAL ELECTRIC CAPITAL CORPORATION, AS
OPERATING AGENT AND AS COLLATERAL AGENT
By /s/ Craig Winslow
------------------------------
Name: Craig Winslow
Duly Authorized Signatory
201 High Ridge Road
Stamford, Connecticut 06927
Attention: Vice President - Portfolio / Cone
Receivables II LLC
Telecopy: (203) 316-7821
76
EXHIBIT 2.1(D)
SECOND AMENDMENT TO SECURITIZATION AGREEMENTS
THIS SECOND AMENDMENT TO SECURITIZATION AGREEMENTS (this "AMENDMENT"),
made and entered into as of January 28, 2000 (the "EFFECTIVE DATE"), by and
between CONE RECEIVABLES II LLC, a North Carolina limited liability company
("CRLLC"), CONE MILLS CORPORATION, a North Carolina corporation ("CONE MILLS";
each of CRLLC and Cone Mills a "Company" and, collectively, the "COMPANIES"),
REDWOOD RECEIVABLES CORPORATION, a Delaware corporation ("REDWOOD"), and GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation ("GECC"), in its capacities
as Operating Agent and Collateral Agent.
W I T N E S E T H:
WHEREAS, Cone Mills, any other Originators that are or may hereafter become a
party thereto and CRLLC are parties to a certain Receivables Transfer Agreement,
dated as of September 1, 1999 (as amended to the date hereof, the "TRANSFER
AGREEMENT"; capitalized terms used herein and not otherwise defined herein shall
have the meanings given such terms in Annex X to the Transfer Agreement as
amended by this Amendment), whereby Cone Mills has agreed (and each Subsidiary
of Cone Mills which thereafter becomes an Originator will agree) to sell,
contribute or otherwise transfer to CRLLC, and CRLLC has agreed to purchase or
otherwise acquire from such Originators, all of the right, title and interest of
such Originators in the Receivables; and
WHEREAS, CRLLC, as Seller, Redwood, as Purchaser, Cone Mills, as Servicer, and
GECC, as Operating Agent and as Collateral Agent, are parties to a certain
Receivables Purchasing and Servicing Agreement, dated as of September 1, 1999
(as amended to the date hereof, the "PURCHASE AGREEMENT"; the Transfer Agreement
and the Purchase Agreement, collectively, the "SECURITIZATION AGREEMENTS"),
whereby Purchaser has agreed, among other things, to purchase from CRLLC from
time to time the Receivables sold or contributed to CRLLC pursuant to the
Transfer Agreement; and
WHEREAS, the Securitization Agreements were amended pursuant to that certain
First Amendment and Waiver to Securitization Agreements, dated as of November
16, 1999, among the parties hereto; and
WHEREAS, Cone Mills has requested that the Securitization Agreements be
further amended in certain respects as set forth in this Amendment, and the
parties hereto are willing to agree to such amendments subject to the terms and
conditions of this Amendment.
NOW THEREFORE, in consideration of the premises and mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. AMENDMENTS OF SECURITIZATION AGREEMENTS. Subject to the terms and
conditions of this Amendment, the Securitization Agreements shall be amended as
follows:
(A) Section 4.03(k) of the Transfer Agreement is hereby amended by
deleting clause (v) thereof in its entirety and by substituting the following
replacement clause (v) in lieu thereof:
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(v) Debt arising under the Credit Facility,
(B) Section 9.01(y) of the Purchase Agreement is hereby deleted in its
entirety and the following new Section 9.01(y) is hereby substituted in lieu
thereof:
(y) (i) the Credit Facility shall be terminated, (ii)
an event of default shall have occurred under the
Credit Facility, or (iii) by July 3, 2000, Cone Mills
shall not have obtained either (a) a refinancing or
an extension of the Credit Facility (as in effect
immediately after giving effect to the Second
Amendment) on terms acceptable to the Purchaser, the
Operating Agent and the Collateral Agent or (b) a
binding written commitment for such refinancing or
extension on terms acceptable to the Purchaser, the
Operating Agent and the Collateral Agent, and in
either such case with the Credit Facility Lenders or
with another lender or lenders acceptable to the
Purchaser, the Operating Agent and the Collateral
Agent.
(C) Annex X to each Securitization Agreement is hereby amended by
deleting therefrom in their entirety the definitions of the terms "CREDIT
FACILITY" and "CREDIT FACILITY AGENT" and by substituting the following new
respective definitions of such terms in lieu thereof:
"CREDIT FACILITY" shall mean that certain Credit Agreement dated as of
January 28, 2000, among Cone Mills, as borrower, the Credit Facility Lenders and
the Credit Facility Lender Agent, and the other loan documents executed in
connection therewith, together with any amendments, restatements, supplements or
modifications thereto or any refinancings, replacements or refundings thereof.
"CREDIT FACILITY LENDER AGENT" shall mean Bank of America, N.A., as
Agent for the Credit Facility Lenders, and its successors and assigns, as well
as the agent for the lenders under any credit facility that refinances or
replaces the Credit Facility.
(D) Annex X to each Securitization Agreement is hereby further amended
by deleting clause (j) of the definition of the term "PERMITTED
ENCUMBRANCES" as set forth therein and by substituting the following
replacement clause (j) in lieu thereof:
(j) Liens created in favor of either or both of the
(other than the Transferred Receivables) to secure
indebtedness arising under the Credit Facility, any interest
rate protection agreement between Cone Mills and any Credit
Facility Lender or any Affiliate thereof, the Prudential Note
Documents, the Morgan Swap Agreement, the Senior Lease
Documents, and/or the Debenture Documents, provided that
concurrently with or prior to the grant of any such Lien to
any Creditor Collateral Agent such Creditor Collateral Agent,
the Seller and the Originators shall have entered into an
Intercreditor Agreement with the Purchaser, the Operating
Agent and the Collateral Agent in substantially the form of
Exhibit 5.03(b) to the Purchase Agreement or in such other
form as may be satisfactory in all respects to the Purchaser,
the Operating Agent and the Collateral Agent in their
discretion and
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the Rating Agency Condition has been satisfied with respect to
such intercreditor agreement;
(E) Annex X to each Securitization Agreement is hereby further
amended by adding thereto the following new definitions:
"CREDITOR COLLATERAL AGENTS" shall mean (i) Bank of America, N.A., as
agent for the Credit Facility Lender Agent, the Credit Facility Lenders,
Prudential, Morgan and the Senior Lease Creditor pursuant to the Collateral
Agency Agreement (Priority), dated as of January 28, 2000, among such parties
and (ii) Wilmington Trust Company, as agent for the Credit Facility Lender
Agent, the Credit Facility Lenders, Prudential, Morgan, the Senior Lease
Creditor, the Debenture Holders and the Debenture Trustee pursuant to the
Collateral Agency Agreement (General), dated as of January 28, 2000, among such
parties.
"DEBENTURE DOCUMENTS" shall mean the Debentures, the Indenture and any
amendments, restatements, supplements or modifications thereto or any
refinancings, replacements or refundings thereof.
"DEBENTURE HOLDERS" shall mean, collectively, the holder or holders
from time to time of the Debentures.
"DEBENTURES" shall mean the $100,000,000 in aggregate principal amount
of debentures due March, 2005, issued by Cone Mills pursuant to the Indenture
and any amendments, restatements, supplements or modifications thereto or any
refinancings, replacements or refundings thereof.
"DEBENTURE TRUSTEE" shall mean The Bank of New York, as successor to
Wachovia Bank, N.A. (formerly known as Wachovia Bank of North Carolina, N.A.),
as trustee for the Debenture Holders under the Indenture, and its successors and
assigns.
"INTERCREDITOR AGREEMENT" shall mean the Securitization Intercreditor
Agreement, dated as of January 28, 2000, among the Purchaser, the Seller, Cone
Mills, the Collateral Agent, the Operating Agent and the Creditor Collateral
Agents and any amendments, restatements, supplements or modifications to or
replacements of such document.
"MORGAN" shall mean Morgan Guaranty Trust Company of New York and its
successors and assigns.
"MORGAN SWAP AGREEMENT" shall mean the ISDA Master Agreement, dated as
of July 20, 1998, between Cone Mills and Morgan as supplemented by a letter
agreement, dated as of July 20, 1998, and any amendments, restatements,
supplements or modifications to or any refinancings, replacements or refundings
of any of the foregoing documents.
"PRUDENTIAL" shall mean The Prudential Insurance Company of America and
its successors and assigns.
"PRUDENTIAL NOTE DOCUMENTS" shall mean the Note Purchase Agreement, dated as
of August 13, 1992, between Cone Mills and Prudential and the Senior Note, dated
as of August 13, 1992, executed by Cone Mills in favor of Prudential in the
original stated principal amount of $75,000,000 and any amendments,
restatements, supplements or modifications to or any refinancings,
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replacements or refundings of any of the foregoing documents.
"SECOND AMENDMENT" shall mean the Second Amendment to Securitization
Agreements, dated as of January 28, 2000, among the Seller, the Purchaser, Cone
Mills, the Operating Agent and the Collateral Agent.
"SENIOR LEASE CREDITOR" shall mean SunTrust Bank, Atlanta, and its successors
and assigns.
"SENIOR LEASE DOCUMENTS" shall mean (i) the Master Lease Agreement, dated as
of October 24, 1994, between Cone Mills as lessee and TCB Realty II Corporation
as lessor as assigned to Atlantic Financial Group, Ltd. pursuant to the
Assignment Agreement dated as of April 15, 1999 among Citicorp Leasing, Inc. and
the Senior Lease Creditor, (ii) the Loan Agreement, dated as of October 24, 1994
(the "DEVELOPMENT LOAN AGREEMENT") between Atlantic Financial Group, Ltd. (as
successor to TCB Realty II Corporation) as borrower and the Senior Lease
Creditor (as successor to Citicorp Leasing, Inc.) as lender, (iii) the other Key
Agreements (as defined in the Development Loan Agreement), and (iv) any
amendments, restatements, supplements or modifications to or any refinancings,
replacements or refundings of any of the foregoing documents.
(E) The Purchase Agreement is hereby further amended by adding the following
new paragraph (k) at the end of Annex 5.02(a) thereto:
(k) Credit Facility Reports and Monthly Financial Statements.
Concurrently with the delivery thereof to the Credit Facility Lender Agent and
the Credit Facility Lenders, copies of (i) each Borrowing Base Certificate and
Compliance Certificate required to be delivered pursuant to Section 9.1(g) of
the Credit Facility and (ii) the monthly balance sheets and statements of
income, stockholders' equity and cash flows required to be delivered pursuant to
Section 9.1(h) of the Credit Facility.
(F) The Transfer Agreement is further amended by deleting Schedule 4.03(k)
thereto in its entirety and by substituting the replacement Schedule 4.03(k)
attached to this Amendment in lieu thereof.
(G) The Purchase Agreement is hereby further amended by deleting Exhibit
5.03(b) thereto in its entirety and by substituting the replacement Exhibit
5.03(b) attached to this Amendment in lieu thereof.
2. NO OTHER AMENDMENTS. Except for the amendments expressly set forth
and referred to in Section 1 above, the Securitization Agreements shall remain
unchanged and in full force and effect.
3. REPRESENTATIONS AND WARRANTIES. Each Company hereby represents and
warrants to Redwood, the Operating Agent and the Collateral Agent that
(a) this Amendment has been duly authorized, executed and delivered
by each Company,
(b) no Termination Event, Incipient Termination Event, Event of
Servicer Termination or Incipient Servicer Termination Event has
occurred and is continuing as of this date, and
(c) all of the representations and warranties made by each Company
in the Securitization Agreements are true and correct in all
material respects on and as of the date of this Amendment
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(except to the extent that any such representations or
warranties expressly referred to a specific prior date). Any
breach in any material respect by either Company of any of its
representations and warranties contained in this Section 3 shall
be a Termination Event and an Event of Servicer Termination for
all purposes of the Securitization Agreements.
4. RATIFICATION. Each Company hereby ratifies and reaffirms each and
every term, covenant and condition set forth in the Securitization Agreements
and all other documents delivered by such Company in connection therewith
(including without limitation the other Related Documents to which each Company
is a party), effective as of the date hereof.
5. WAIVER BY THE SELLER AND CONE MILLS. Each of the Seller and Cone
Mills hereby waives any claim, defense, demand, action or suit of any kind or
nature whatsoever against the Purchaser, the Operating Agent or the Collateral
Agent arising on or prior to the date hereof in connection with any of the
Securitization Agreements or the transactions contemplated thereunder.
6. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective,
upon the Effective Date, subject to the satisfaction of the following conditions
on or prior to such date:
(a) the receipt by the Operating Agent of this Amendment, duly executed,
completed and delivered by each of the Companies, Redwood, the
Collateral Agent and the Operating Agent;
(b) the receipt by the Operating Agent of the Intercreditor Agreement, duly
executed, completed and delivered by each of the Companies, Redwood,
the Collateral Agent, the Operating Agent and the Creditor Collateral
Agents;
(c) the receipt by the Operating Agent of the initial Borrowing Base Certificate
and the initial Compliance Certificate required to be delivered by Cone Mills
pursuant to Section 9.1(g) of the Credit Facility;
(d) the receipt by the Operating Agent of financial projections for Cone Mills
and its Subsidiaries for their fiscal year ending December 31, 2000, to include
(i) quarterly income statements, balance sheets, cash flow projections and
financial covenant calculations for such period and (ii) 13-week consolidated
cash flow projections for Cone Mills and its subsidiaries commencing with the
week starting January 17, 2000;
(e) the receipt by the Operating Agent of an Incumbency Certificate from CRLLC
in the form of Exhibit A attached hereto and such other documents, certificates,
instruments and opinions of counsel as Redwood, the Collateral Agent or the
Operating Agent may reasonably request; and
(f) the receipt by the Operating Agent of all fees and expenses payable to
Redwood, the Collateral Agent or the Operating Agent, respectively, in
connection with this Amendment including without limitation the reasonable legal
fees and other reasonable out of pocket expenses of Redwood, the Collateral
Agent or the Operating Agent incurred in connection with this Amendment.
7. REIMBURSEMENT OF EXPENSES. Each Company hereby agrees that it
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shall reimburse Redwood, the Collateral Agent and the Operating Agent on demand
for all reasonable costs and expenses (including without limitation reasonable
attorney's fees) incurred by such parties in connection with the negotiation,
documentation and consummation of this Amendment and the other documents
executed in connection herewith and therewith and the transactions contemplated
hereby and thereby.
8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK FOR CONTRACTS TO BE PERFORMED
ENTIRELY WITHIN SAID STATE.
9. SEVERABILITY OF PROVISIONS. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction. To the extent
permitted by Applicable Law, each Company hereby waives any provision of law
that renders any provision hereof prohibited or unenforceable in any respect.
10. COUNTERPARTS. This Amendment may be executed in any number of
several counterparts, all of which shall be deemed to constitute but one
original and shall be binding upon all parties, their successors and permitted
assigns.
11. ENTIRE AGREEMENT. The Securitization Agreements as amended by this
Amendment embody the entire agreement between the parties hereto relating to the
subject matter hereof and supersedes all prior agreements, representations and
understandings, if any, relating to the subject matter hereof.
12. CONE MILLS' AND GECC'S CAPACITIES. Cone Mills is executing and
delivering this Amendment both in its capacity as an Originator under the
Transfer Agreement and as the Servicer under the Purchase Agreement and all
references herein to "Cone Mills" shall be deemed to include it in both such
capacities unless otherwise expressly indicated. GECC is executing and
delivering this Amendment both in its capacity as the Operating Agent for
Redwood and as the Collateral Agent for Redwood and the Purchaser Secured
Parties, and all references herein to "GECC" shall be deemed to include it in
both such capacities unless otherwise expressly indicated.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed
by their respective officers thereunto duly authorized, as of the date first
above written.
CONE RECEIVABLES II LLC
By: /s/ Samir M. Gabriel
-----------------------
Name: Samir M. Gabriel
Title: President
REDWOOD RECEIVABLES
CORPORATION
By: /s/ Denis M. Creeden
-----------------------
Name: Denis M. Creeden
Title: Assistant Secretary
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CONE MILLS CORPORATION, AS AN ORIGINATOR
AND AS SERVICER
By: /s/ Neil W. Koonce
-----------------------
Name: Neil W. Koonce
Title: Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION, AS OPERATING AGENT
AND AS COLLATERAL AGENT
By: /s/ Craig Winslow
-----------------------
Name: Craig Winslow
Duly Authorized Signatory
84
EXHIBIT 2.2(b)
COMMERCIAL AGREEMENT
The Purpose of this Agreement by and between Compania Industrial de Parras, S.A.
de C.V. ("Parras") and Cone Mills Corporation ("Cone") is to (i) terminate and
supersede the prior Commercial Agreement dated as of June 25, 1993, and (ii) to
set forth the terms under which products produced by Parras Cone de Mexico, S.A.
de C.V. ("JV") will be sold and distributed.
Based on the above, Parras, Cone and JV agree as follows:
1. Parras, Cone, and JV release each other from any and all claims in
connection with the Commercial Agreement entered into between the
parties dated as of June 25, 1993. Parras and Cone will sell their
respective products unrestrictedly worldwide.
2. Except as provided for in paragraphs 3 and 6 below, Cone shall be the
exclusive seller and distributor of JV products. In consideration for
the marketing rights for the JV, Cone will pay Parras a marketing
rights fee of 3.5% (three and one-half percent) of the net customer
sales of JV product. This payment will be payable on a monthly basis
the 25th day of the second month following the month the calculation is
based upon.
3. In the event of an expansion of the JV beyond its present capacity,
Parras and Cone will modify this commercial agreement to address the
additional capacities available for sale. At such time up to 50% of
such expansion will be made available to Parras for its strategic
customers.
4. In situations that Cone invoices the customer, the price that the JV
invoices Cone will be the estimated customer selling price for that
style for the quarter less a service fee of 12% (twelve percent). In
consideration of differential borrowing rates between the U.S. and
Mexico, the JV will invoice Cone on 50-day terms with a discount in the
selling price equivalent to 15 days interest at 8% (eight percent).
Said service fee will cover all expenses such as selling costs, the
marketing rights fee, product improvement, logistics, production
programming, etc. Each quarter Cone shall submit a schedule to the JV
showing actual prices. Any adjustment of the actual billings from JV to
Cone will be made 45 days following the end of the quarter with a debit
or credit memo to be issued by the JV for the difference between
estimated customer selling prices and actual prices. Parras shall be
entitled at any time to review and/or audit sales of JV products
effected through Cone. For purposes of this paragraph net sales shall
be after deductions of amounts representing: credits by JV for returned
or defective merchandise; allowances to customers, trade and other
discounts; sales, excise, value added and similar taxes levied upon
sales.
5. In situations that the JV bills the actual customer due to value added
tax considerations, Cone will be paid by JV a service fee of 12%
(twelve percent) of the net sales of JV for such customers. Said
service fee will cover all expenses such as selling costs, the
marketing rights fee, product improvement, logistics, production
programming, etc. The payment of the service fee by the JV will be
payable on a monthly
85
<PAGE>
basis the 25th day of the second month following the month the
calculation is based upon. For purposes of this paragraph net sales
shall be after deductions of amounts representing: credits by JV for
returned or defective merchandise; allowances to customers, trade and
other discounts; sales, excise, value added and similar taxes levied
upon sales. Cone will be responsible for credit losses to these
customers.
6. From time to time due to imbalances in the marketplace vis a vis Cone's
traditional customer base versus Parras' traditional customer base,
Cone may offer a portion of the production from the JV to Parras. In
such situation the JV will invoice goods to Parras in accordance with
paragraph 4 except that Parras will be responsible for credit losses to
these customers. Cone will not include such sales by Parras in the
calculation of the marketing rights fee for that period.
7. Any dispute relating to this agreement shall be finally settled by
arbitration under the Rules of Arbitration of the International Chamber
of Commerce in effect on the date hereof. This agreement shall be
arbitrated in and governed and construed in accordance with the laws of
the state of New York.
8. Parras and Cone agree to honor each other's trademarks and trade names
and grant to JV a non-exclusive non-assignable right to use the Parras
and Cone names as a composite.
9. Unless earlier terminated by mutual consent, this Agreement shall be
reviewed upon the second (2d) anniversary of the date hereof, and any
changes will be mutually agreed by the parties.
86
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly appointed representatives
to execute this Agreement effective as of July 1, 1999.
COMPANIA INDUSTRIAL DE PARRAS, S.A. DE C.V.
By: /s/ Rodolfo Garcia Muriel
Name: Rodolfo Garcia Muriel
Title: Ing.Financial Officer
PARRAS CONE DE MEXICO, S.A. DE C.V.
By: /s/ Ernesto Lappe
Name: Ernesto Lappe
Title: Operations Director
CONE MILLS CORPORATION
By: /s/ Gary L. Smith
Name: Gary L. Smith
Title: Executive Vice President and Chief Financial Officer
87
EXHIBIT 4.4(H)
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT (the "Agreement"), dated as of January 28,
2000, is entered into by MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent
(the "Agent") for each of the Banks, as defined in the Credit Agreement (as
defined below) party to the Credit Agreement (collectively, the "Banks"), in
favor of CONE MILLS CORPORATION, a North Carolina corporation (the "Borrower"):
R E C I T A L S
WHEREAS, the Borrower, the Agent and the Banks have entered into that
Credit Agreement dated as of August 7, 1997, as amended by that Amendment No. 1
and Waiver to the Credit Agreement dated as of October 3, 1999 (the "Credit
Agreement");
WHEREAS, in connection with that certain Credit Agreement to be dated
of even date herewith by and among the Borrower, Bank of America, N.A., as
Revolving Credit Agent ("Revolving Credit Agent" or "Bank of America"), and the
lenders party thereto from time to time, Bank of America is requiring that the
Credit Agreement and the Notes issued pursuant thereto (the "Notes") be
terminated; and
WHEREAS, on the date hereof the Borrower has terminated the Commitments
(as defined in the Credit Agreement) and has prepaid its Loans (as defined in
the Credit Agreement), with respect to principal, interest and costs, under the
Credit Agreement in full and, in connection therewith, the Borrower has
requested that the Agent terminate the Credit Agreement and the Notes (except to
the extent the terms and provisions of such documents provide rights or remedies
to the Agent or the Banks which survive a termination of the Commitments) and
release the rights and obligations of the Borrower and its Subsidiaries created
pursuant to the Credit Agreement and the Notes.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Terms defined in the Credit Agreement and not
otherwise defined herein are used herein as therein defined.
SECTION 2. PAYOFF AMOUNT. The total principal amount of all Loans
outstanding under the Credit Agreement as of the date hereof is $72,000,000. The
total amount of interest, fees and other amounts due under the Credit Agreement
as of the date hereof is $404,782.22. The total payoff amount of principal,
interest, fees and all other amounts due under the Credit Agreement as of the
date hereof is $72,404,782.22 (the "Payoff Amount").
SECTION 3. TERMINATION OF AGREEMENTS. Upon receipt of the Payoff
Amount, the Credit Agreement and each of the Notes is hereby terminated (except
to the extent the terms and provisions of the Credit Agreement provide rights or
remedies to the Agent or the Banks which expressly survive termination of the
Commitments) and shall be of no further force and effect from and after the date
hereof; provided that terms and provisions that provide for rights or remedies
to the Agent or the Banks which expressly survive such termination, and any
rights of indemnification granted thereby to the Agent and the Banks and all
88
<PAGE>
obligations of the Borrower or any Subsidiary to pay expenses under the Credit
Agreement, shall survive and shall not be terminated.
SECTION 4. DELIVERY OF NOTES. The Agent agrees to cause to be delivered
to the Borrower on the effective date hereof, the Notes.
SECTION 5. FURTHER ASSURANCES. Upon and after the effective date
hereof, the Agent shall execute and deliver, at the Borrower's expense, such
documents, instruments and other agreements, as the Borrower or Bank of America
shall reasonably request to evidence the termination and release effected
hereby.
SECTION 6. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. COUNTERPARTS. This Agreement may be executed in any number
of counterparts each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement.
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
duly executed and delivered by its officer thereunto duly authorized as of the
date first above written.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
AS AGENT FOR THE BANKS
By: /s/ Kimberly L. Turner
Name: Kimberly L. Turner
Title: Vice President
CONE MILLS CORPORATION
By: /s/ Gary L. Smith
Name: Gary L. Smith
Title: EVP and CFO
89
EXHIBIT 21 - SUBSIDIARIES
CONE MILLS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage
State or Of Voting
Jurisdiction of Securities
Name Address Incorporation Owned
- ---- ------- ------------- -----
<S> <C> <C> <C>
Cone Mills (Mexico), S.A. de C.V. Mexico City Mexico, D.F. 100%
Comercializadora Cone Mills, S.A.
De C.V. Mexico City Mexico, D.F. 100
Cone Mills (Europe) S.A. Zaventem, Belgium Brussells, Belgium 100
Cone Singapore, PTE., Ltd. Singapore Republic of Singapore 100
Cone Foreign Sales Corporation Greensboro, NC Barbados 100
Cone Mills International Corporation Greensboro, NC North Carolina 100
Cone Global Finance Corp. San Francisco, CA California 100
CIPCO, S.C., Inc. Carlisle, SC Delaware 100
Cornwallis Development Co. Greensboro, NC North Carolina 100
Boelas Pipeline Corporation Greensboro, NC Louisiana 100
Cliffside Railroad Company Cliffside, NC North Carolina 98
House 'N Home Fabrics
and Draperies, Inc. New York, NY New York 100
Cone Receivables, LLC Greensboro, NC Delaware 100
Cone Foreign Trading, LLC Greensboro, NC North Carolina 100
</TABLE>
90
EXHIBIT 23.1
MCGLADREY & PULLEN, LLP
Consent of McGladrey & Pullen, LLP, Independent Auditor
We hereby consent to the incorporation by reference in Cone Mills Corporation's
Registration Statements on Form S-8 (Nos. 33-31977; 33-31979; 33-51951;
33-51953; 33-53705 and 33-67800) of our reports; dated February 11, 2000, with
respect to the consolidated financial statements and schedule included in the
Annual Report on Form 10-K of Cone Mills Corporation for the fiscal year ended
January 2, 2000.
/s/McGLADREY & PULLEN, LLP
--------------------------
MCGLADREY & PULLEN, LLP
Greensboro, North Carolina
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONE MILLS
CORPORATION CONSOLIDATED FINANCIAL STATEMENTS DATED JANUARY 2, 2000, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-2-2000
<PERIOD-START> JAN-4-1999
<PERIOD-END> JAN-2-2000
<CASH> 1,267
<SECURITIES> 0
<RECEIVABLES> 52,581
<ALLOWANCES> 5,050
<INVENTORY> 110,613
<CURRENT-ASSETS> 165,560
<PP&E> 467,825
<DEPRECIATION> 246,367
<TOTAL-ASSETS> 472,797
<CURRENT-LIABILITIES> 150,323
<BONDS> 119,115
0
35,564
<COMMON> 2,548
<OTHER-SE> 119,373
<TOTAL-LIABILITY-AND-EQUITY> 472,797
<SALES> 616,321
<TOTAL-REVENUES> 616,321
<CGS> 568,197
<TOTAL-COSTS> 616,848
<OTHER-EXPENSES> 16,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (13,914)
<INCOME-PRETAX> (30,458)
<INCOME-TAX> (10,740)
<INCOME-CONTINUING> (18,034)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,038)
<NET-INCOME> (19,072)
<EPS-BASIC> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
